Method and system balancing resources and claims into retirement

ABSTRACT

The present disclosure relates to household portfolio simulation and analysis to provide retirement income. In particular, it discloses advanced technologies for modeling, simulation and analysis of potential economic futures, as applied to household retirement prospects. Improved modeling may capture factors such as concrete objectives of participants&#39; priorities among objectives, risk adversity and starting conditions that impact tax consequences of transactions. Improved modeling may address consistency among similar factors, tax consequences in simulation periods and transactions in real estate and private investments. Improved analyzes may apply a margin of safety and/or risk budget analysis to a household portfolio to produce a meaningful presentation.

RELATED APPLICATIONS

This application is a continuation of U.S. patent application Ser. No.11/627,814, filed 26 Jan. 2007, which issued as U.S. Pat. No. 7,689,494on Mar. 30, 2010, titled SIMULATION OF PORTFOLIOS AND RISK BUDGETANALYSIS which claims the benefit of U.S. Provisional Patent ApplicationNo. 60/785,117, filed Mar. 23, 2006. The related applications areincorporated by reference by reference herein in their entirety.

COPYRIGHT NOTICE

A portion of the disclosure of this patent document contains materialthat is subject to copyright protection. The copyright owner has noobjection to the facsimile reproduction by anyone of the patent documentor the patent disclosure as it appears in the U.S. Patent and TrademarkOffice patent file or records, but otherwise reserves all copyrightrights whatsoever.

BACKGROUND OF THE INVENTION

The present disclosure relates to household portfolio simulation andanalysis to provide retirement income. In particular, it disclosesadvanced technologies for modeling, simulation and analysis of potentialeconomic futures, as applied to household retirement prospects.

Many books are available to introduce risk budgeting and portfoliosimulation to portfolio advisors, such as Pearson, N. 2002. RiskBudgeting: Portfolio Problem Solving with Value-at-Risk. New York: Wiley& Sons; Meucci, A. 2005. Risk and Asset Allocation. New York:Springer-Verlag; and Scherer, B. 2004. Portfolio Construction and RiskBudgeting, Second Ed. London: Risk Books. While these books are verytechnical and present mathematically sophisticated treatments ofinstitutional portfolios, the problem of simulating and analyzinghousehold portfolios is much more difficult than institutionalportfolios. Factors that complicate individual portfolio include limitedanalytical resources, household objectives that change over a lifetime,prioritization of individual and household objectives, and complexincome flows and spending goals. Tax minimization presents more issuesand alternatives for a household than for an institutional portfolio.The simple objective of “maximize wealth” and the assumption of“non-satiation” (that dollars are of equal value, regardless of whethermonthly income is $1,000 or $10,000 or $100,000) do not suit householdportfolios.

Shortcomings of prior household portfolio simulation and modelingapproaches reduce the resulting analysis to a general indication of thedirection that a retirement plan will go, without enough accuracy to beused as a plan that can be implemented. In other systems, goals aretypically mapped independently (1-to-1) with portfolios or sub-accounts,making it difficult for advisors and their clients to understand theinterdependencies between goals and make important trade-off decisions.A limited view of the investor's resources is provided, which excludescertain asset classes, product types, assets held away, and majorliabilities, frequently providing an overly optimistic or pessimisticview of the likelihood of meeting financial goals. Investment plansassume a static, fixed asset allocation over time, even though theclient's investment strategy should be adjusted as their investment timehorizon decreases and other changes impact the investment strategy.Investment planning applications are poorly integrated with thefinancial institution's investment product offerings and investmentpolicies. Goal planning models are typically deterministic and formulaic(vs. stochastic and personalized). Output appears canned or “cookiecutter.” Together, these factors typically yield investment plans whichare not properly aligned with an investor's true objectives andpreferences, and are difficult to manage over time as the investor'sresources, investment needs, goals, and priorities shift. Simulationover both capital markets and longevity/morbidity.

A preliminary discussion of household portfolio treatment by some ofthese inventors appeared as Torre & Rudd, “The Portfolio ManagementProblem of Individuals: A Quantitative Perspective,” Journal of WealthManagement (Summer 2004). It was discussed in a keynote speech at theIMN World Series of ETFs, by Andrew Rudd, “A New Approach to FinancialPlanning,” on Mar. 31, 2005.

An opportunity arises to improve on household portfolio management. Inone aspect, concrete goals such as “pay for 100% of Susan's publiccollege BA degree, which currently would cost $XX,000 a year” or“partially retire between age 55 and 65, with a partial retirementincome of $XX,000 a year” can be elicited and automatically convertedinto future financial constraints. Priorities among concrete goals canbe elicited, such as goals rated primary, secondary, and additionalgoals. Levels of satisfaction of concrete goals can be elicited, such aslevels rated planned, minimum and better. In another aspect, thepotential for unemployment can be evaluated by simulation, reflectingthe chance and potential duration of a reversal of fortune. A furtheraspect is that results of simulations can be reported in terms ofcomplete or partial accomplishment of prioritized goals. Bettersimulations of future economic impacts and more readily understoodmeasures of effectiveness for alternative portfolio strategies resultfrom various embodiments and combinations of aspects of this technology.

SUMMARY OF THE INVENTION

The present disclosure relates to household portfolio simulation andanalysis to provide retirement income. In particular, it disclosesadvanced technologies for modeling, simulation and analysis of potentialeconomic futures, as applied to household retirement prospects. Improvedmodeling may capture factors such as concrete objectives ofparticipants' priorities among objectives, risk adversity and startingconditions that impact tax consequences of transactions. Improvedmodeling may address consistency among similar factors, tax consequencesin simulation periods and transactions in real estate and privateinvestments. Improved analyses may apply a margin of safety and/or riskbudget analysis to a household portfolio to produce a meaningfulpresentation.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 depicts a high-level hardware architecture that can be usedimplement embodiments of the technology disclosed.

FIG. 2 provides additional detail regarding one implementation of thepresentation architecture.

FIG. 3 presents the software architecture without explicit demarcationof the corresponding hardware.

FIG. 4 is a high-level schematic of a use case, proceeding from creationof a household through creation of a client report.

FIG. 5 illustrates entry of an educational expense goal, as a concreteobjective rather than a cash flow.

FIG. 6 depicts one flow of collecting retirement goal information. Theleft hand diagram illustrates the overall flow.

FIGS. 7A-7B depict one interface that implements steps in the FIG. 6flow.

FIG. 8 depicts the relationship between a retirement timing goal and aplurality of income goals and retirement timings.

FIGS. 9A-9B include selected excerpts from the object model schema (OMS)of a retirement goal.

FIG. 10 depicts additional detail of goal balancing.

FIG. 11 depicts a lifetime resources and claims statement, adapted toretirement planning.

FIGS. 12-13 graph margin of safety analysis.

FIG. 14 depicts representative paths of total resources.

FIG. 15 labels the paths from fortunate to unfortunate, based on eithera current progress or a projected outcome at the end of the planninghorizon.

FIG. 16 normalizes the fortunate to unfortunate trajectories.

FIG. 17 depicts two major adjustments in asset allocation along a normaleconomic trajectory through the course of life.

FIG. 18 depicts risk and reward relationships for a personal investmentopportunity and the general investment opportunity.

FIGS. 19A-19B and 20A-20B present a cash flow and pro forma tax formreport generated by simulation.

FIG. 21 depicts a display useful for goal balancing.

DETAILED DESCRIPTION

The following detailed description is made with reference to thefigures. Preferred embodiments are described to illustrate the presentinvention, not to limit its scope, which is defined by the claims. Thoseof ordinary skill in the art will recognize a variety of equivalentvariations on the description that follows.

Overview

A long term plan in an uncertain economic environment is impractical fora human portfolio analyst to test without computer assistance. Thelimitations and biases of human judgment undermine mental projections.Possible future outcomes explode geometrically as a monthly or moregranular time horizon extends to 10, 20 or 30 years. Humans tend to biasprojected results, even unconsciously. A long term plan cannot be testedby mental or manual processes. A computer-based system is essential.

Computer-based embodiments address the distinct technical problems oftranslating concrete objectives into problem constraints that can betested by simulation, simulating long term plans through self-consistenteconomic conditions with sufficient repetitions to illustrate theuncertain economic environment, and displaying simulation results in ameaningful way. Some computer-based embodiments may go further, tosearch for a recommended long term plan. This is particularlycomputation-intensive, because the satisfaction indifference surface forseveral concrete objectives is multi-dimensional and may be verycomplex, with local maxima that are mapped and evaluated using advancednumerical methods.

It is difficult to formulate constraints from concrete objectives for ahousehold's long term plan, because of the difference between concreteobjectives and constraints that are amenable to modeling, simulation andsensitivity analysis. For instance, a concrete objective may be to payfor Susan's public college BA degree, which currently would cost $xx,000a year. A household having a single 10 year old child can look up thecurrent cost of college tuition, but is unlikely to accurately predictits future cost, eight to ten years in advance, much less make aprediction consistent with simulated economic conditions. The range ofcollege options, such as public community colleges, state colleges, andstate universities, parochial colleges, private colleges, and selectprivate colleges impacts the rate at which the future cost of educationincreases—tuition costs typically change at a different rate than livingcosts. Another example of a concrete objective is to partially retirebetween age 55 and 65, with a partial retirement income of x currentdollars a year. This objective translates into a series of alternativegoals to be tested by simulation, with income requirements that areadjusted consistent with the simulation.

Goals such as a bequest, education, family support, financial reserve,lump sum expenditure, real property purchases, household disposableincome and wealth building present different timing and taxconsequences. Over-simplification of concrete goals into a single annualincome requirement is a mistake that concrete goals technology corrects.An automatic tool for translating a concrete goal into formalconstraints assists a typical household to be able to describe a wholelong term plan; automatically adjusting constraints to match simulatedeconomic conditions over a long-term horizon depends on using acomputerized model.

Simulating a range of long-term plans for comparison purposes, takinginto account economic uncertainty, is beyond the mental or manualcapabilities of even the most skilled analyst. Simulations may be factordriven and should produce self-consistent sets impacts on differenttypes of investments, faithful to historical or adjusted historicalcovariance data. For instance, when stocks decline sharply, the price ofbonds goes up as investors shift their money from equities to bonds. Or,when interest rates go up, bank stocks rise and housing starts to fall.Covariance is a typical measure of how the performance of one assetclass tracks another asset class. For overall economic simulation,smaller or larger sets of factors may be used. Monte Carlo simulation ispopular for simulating events over time. One or more random numbergenerators typically are invoked for a simulation period to determinethe direction and magnitude of economic factor vectors. Individualassets and income requirements are simulated consistent with theeconomic vectors, sometimes with a secondary random number generator tosimulate intra-period variation, for instance, between a particularstock and the sector to which it belongs. In each simulation, adifferent seed is used for the random number generator(s) and the futureeconomic history follows a different course. Evaluation of a long-termplan may involve 100 or more simulations, to generate a distribution ofpotential results of following the plan.

As a simulation proceeds, numerous calculations are performed. In aparticular period, both the performance of the asset base and thesatisfaction of income requirements need to be taken into account.Multiple levels of income requirement satisfaction may be simulatedduring a particular simulation run. The start of period t+1 depends onthe performance of the asset base, the realistic extent to whichprimary, secondary and additional income goals, planned and minimumincome requirements can be met, and the erosion (or accumulation) of theasset base.

Simulating the tax consequences of long-term plans can bring morerealistic results, results that tangibly predict a household's economicwell-being, rather than pointing a general direction. Tax consequencesimulation depends on description of the starting condition of ahousehold portfolio, selection of a long-term plan and simulation ofresulting tax realization events. These detailed calculations exacerbatethe technical problems encountered trying to evaluate long-term plans.

Extensive simulation can produce too much data. Raw data reports aremeaningless to all but the most experienced analysts. Anyone interestedin the results of a simulation and the performance of a long-term plancan benefit from well-selected summary statistics. Use of concreteobjectives affords a set of summary statistics. For instance, if ahousehold has ten concrete objectives, a simulation can report how oftenthe goals are fully satisfied and, for goals that are not fullysatisfied, the extent to which they are partially satisfied.Satisfaction of objectives can be stratified by fortunate, normal andunfortunate economic circumstances, or with additional categories orpercentiles of simulated economic outcomes, such as quartiles ordeciles. The range of outcomes can be presented both as a spread, overtime, in potential results and as wandering paths that exemplarysimulations follow to reach to a final event horizon. The impact ofpartial or full retirement at different ages can be concretelyevaluated.

Lifetime resources and claims can be presented in a hybrid balance sheetformat, sometimes called a lifetime resources and claims statement. Theassets and liabilities of an accountant's balance sheet are bankable andstatic, at a particular time. Lifetime resources and claims areanticipatory forward looking. Resources may be grouped as investmentsand other resources. Claims may be grouped as obligations, primary,secondary and additional goals, and residual wealth building. Resourcesinclude human capital, roughly, future income histories of the householdwage earners. Obligations include deferred taxes and income taxes thatwill be accrued in the future. A current lifetime resources and claimsstatement summarizes resources and concrete goals. A simulation resultslifetime resources and claims statement can be constructed that reflectsthe results of favorable, expected or unfavorable economic conditions,or other desired ranges of economic conditions. The simulation lifetimeresources and claims statement can illustrate scenarios that are easierfor a household to understand than raw probabilities, such as “employeestock options lose all value”, or “Sally dies prior to Charles, with aresulting loss of income.”

Stress testing of scenarios produces results distinct from the usualcases. Stress testing can cover economic conditions, disability,catastrophic illness and even death of a wage earner. The summarymeasures appropriate for explaining stress tests may differ from theordinary measures.

Using a computer instead of mental processes or the fullness of time isthe only way to rigorously simulate performance of a long term plan.Even with a computer, numerous technical problems are resolved by thetechnology disclosed, each of which should be considered an invention inits own right. Embodiments need not exercise all of the technicalimprovements disclosed; it is expected that those of skill willrecognize a wide variety of valuable alternative combinations andsubcombinations of features described herein, into subsystems, systemsand enhanced systems.

Hardware and Software Architectures

FIG. 1 depicts a high-level hardware architecture that can be used toimplement embodiments of the technology disclosed. The major groupingsof this hardware architecture are applications and user interface 101,application controller 103, data integration 105, batch applicationservices 107, real-time application services 109 and off-line dataprocesses 111. The legend indicates that a client system is linked incommunication with a server system. As depicted, this hardware isarranged in an application service provider (ASP) configuration, whichmeans that certain processes, such as computing intensive processes,security sensitive processes and processes that rely on subscription orproprietary data are hosted on servers. In some implementations, theservers will be remotely hosted. Some customers will set up their ownservers. A shared server is useful for computing intensive processes,because the computing resources can be shared among many users. In thedisclosure that follows, it will be apparent that a few analysis stepsinvolve many times more computing resources than all the data entrysteps that precede analysis. A shared server also is useful for securitysensitive processes, because fewer systems need to be secured than ifall of the sensitive data were downloaded to all of the workstationsused for data entry. A shared server is further useful for processesthat rely on subscription or proprietary data, because subscriptionsoften are priced based on the number of servers updated on a regularbasis. It may be less expensive or more convenient to update a singleserver or server farm and perform calculations from the updated hardwarethan it would be to distribute the subscription data to numerousworkstations. Of course, while an ASP model has advantages, someworkstations are capable of running both the client and server side ofan application. That is, they can run a server such as Apache and alsorun a browser such as Mozilla that accesses the server.

The application user interface 101 depicts alternative interfaceapplications, complementary levels of service and complementary user andadministrative interfaces. The retirement income planning module 115 andthe ultra high net worth module 120 represent complementary levels ofservice and interface structures adapted to different customers. Theretirement income planning module 115 potentially includes alternativeWebapp 116 and thick client 117 interfaces. The retirement incomeplanning Webapp 116 is commonly known as a thin client. It can beimplemented using JavaScript and a conventional browser such asMicrosoft Internet Explorer, Netscape's browser, Opera, Safari,Mozilla's Foxfire or another browser. Other implementation softwareoptions such as PHP, Perl and Java also are available for thin clients.The retirement planning Webtop 117 is commonly known as a thick client.Some of the programming languages for preparing a thick client includeJava and the visual languages, such as Visual Basic and Visual C++. Inaddition to thick and thin client interfaces, the retirement incomeplanning application includes an enterprise control Webtop 118 (orWebapp) that one or more analysts would use to store and manipulate datafor a plurality of customers. The ultra high net worth module 120similarly includes a Webapp thin client 121, a Webtop thick client 122and an enterprise control Webapp or Webtop 123. The modules of theapplication or user interface 101 typically are operated on a laptop,desktop or workstation. The application user interfaces are coupled incommunication with an application controller module 103.

The application controller module 103 may include a money machineapplication controller 125, a client information database 126 and afinancial plan database 127. The application controller 103 managesupdating of client-related input and invokes real-time applicationservices 109. The application controller process 125 accesses andupdates a client information database 126 and a financial plan database127, responsive to requests from the application and user interface 101.A data integration module 105 can be invoked by the applicationcontroller to import information for the client database 126 from anexternal source such as a brokerage client application. The dataintegration module 105 also can be invoked by the application controllerto import information for the financial plan database 127, such as stockholdings from a client asset list. More than one client asset list maybe accessible to the data integration module 105, such as a first assetlist for holdings managed by a particular analyst and additional assetlists for brokerage accounts managed elsewhere. Changes in clientinformation or asset lists may be published for access by the dataintegration module 105 and automatically posted to the clientinformation database 126 and/or the financial plan database 127, withoutinvocation by the application controller module 103. Alternatively, theapplication controller 125 can publish to the application and userinterface 101 the availability of updated data and post updates to thedatabases 126, 127 under user control, mediated by the applicationcontroller module.

The financial plan database 127 further is subject to updating by thebatch application services 107 and the off-line data process 111. Thebatch application services 107 may include a monitoring process 140, aperiodic reporting process 141, a data delivery process 143 and aconfiguration management process 142. The monitoring process 140repeatedly and periodically checks the status of client assets againstthe plan. It also may check liabilities. This monitoring process 140 ismore persistent and consistently available to watch for variationsbetween the plan and the market than either a client or analyst wouldbe, as the process 140 does not become distracted or take vacations. Themonitoring process can monitor for variations from the plan such as aneed to rebalance the portfolio, a lack of stoploss orders or a generaldeterioration in a segment of the client's asset base. The monitoringprocess may detect deterioration in asset segments more readily andaccurately than either a client or analyst would. It uses the datadelivery process 143 to reach the client or analyst by predeterminedmeans, consistent with the urgency of a particular alert.

A periodic reporting module 141 may generate reports on demand or atpredetermined periods, such as weekly, monthly or quarterly. Themonitoring process 140 and periodic reporting process 141 can beconnected to a data delivery process 143 that transmits alerts orperiodic reports to the client and/or analyst. The data delivery processin 143 may send e-mails, SMS messages, faxes, pages or other alerts. Thealerts may provide complete information or a link to a location at whichcomplete information can be accessed.

The off-line data process may include data support 145 and raw vendordata. The raw vendor data 146 is depicted as a database, but may be aWeb service or other online source. Raw vendor data may include assetpricing and asset characteristics, such as estimates of volatility andcovariance or correlation of performance among asset classes. Datasupport 145 may include data assembly, calculation and data collection.

The application controller 125 may invoke real-time application services109. In one embodiment, application services include a report generator131, a solver and simulator 130, 132 and an asset master 133. In turn,these processes are connected to databases 134-137. As clientinformation is entered, the asset master 133 and asset master database137 may be accessed for templates used to assemble information aboutparticular client assets and goals or concrete objectives. Reference tomaster templates simplifies the extension and updating of systemdesigns. Once assets and goals have been entered, the solver 130 andsimulator 132 can be invoked. The solver is beyond the scope of thisapplication. One form of simulation uses Monte Carlo simulation. Thesimulator 132 may access the Monte Carlo simulation database 136.Simulation parameters such as number of simulation runs, time interval,probability distributions for model factors, probability distributionsfor particular assets given particular model factors, covariance factorsand similar data may usefully be maintained in a simulation database.The simulation parameters may reflect a random walk approach, a trendingapproach or other approach to the relationship of model factors insuccessive periods.

The basic need of the simulator is a mechanism for generating possiblefuture price paths for the assets and liabilities entering into thesimulation, for instance stocks, bonds, houses, college tuitions, livingexpenses, etc. These paths should be generated consistent with oneanother so one may evaluate the adequacy of the assets for funding theliabilities.

There are several methods for generating financial asset price paths.Typically, one starts with the current price as given and by generatinga chain of price changes arrives at the price at a future time. A pricechange over a fixed time interval, e.g. a month, is referred to as areturn. Typically, one models the returns as being multivariate normallydistributed random variables where the distribution is characterized byits mean vector and covariance matrix. The mean vector and covariancematrix are the governing parameters of this model. There is a wholescience devoted to how to extract reasonable estimates of thesequantities from historical data. Application of the methods toparticular financial markets involves a certain degree of art andapplication of care and judgment. As a result, the commercialmarketplace recognizes the models of different practitioners as beingdistinguishable entities. Thus, one speaks of the Barra model, theRiskMetrics model and so forth. Certain models have establishedpositions of commercial leadership and are taken as reference orstandard models for particular domains of application. The models evolvegradually with changes in the markets.

With the simulation disclosed, we have extended financial modelingmethods into new areas. We have developed models of living expenses,house prices and education expenses. We have integrated these newapplications with traditional financial asset modeling in a new andsystematic fashion. Even recognizing the need for an integrated modelappears to be novel, because retirement planning software typicallytreats inflation as an omnibus parameter that largely drives the outcomeof the model.

We also have extended actuarial modeling. Actuaries have long compileddata on the incidence of illness and the probability of dying. We haveapplied this information to simulating possible life histories thatmodel individuals getting sick, lingering for some period and thendying. The purpose of this level of detailed modeling is to evaluate theadequacy of medical insurance coverage in the context of a totalfinancial plan. It has been difficult to get adequate data to supportthese analyses since the relevant data collecting agencies (e.g. bureausof vital statistics, departments of health) do not recognize thequestions of interest. Identifying the need to model illness beforedeath in a simulation is a significant contribution of the workdisclosed herein.

A report generator 131 can be shared among complementary levels ofservice offered through the application and user interface 101, such asthe retirement investment planning 115 and ultra high net worth 120services. Templates for alternative services 134, 135 can be combinedwith financial plan data 127 and simulation results 132 to generatereports.

A documentation and help module 150 complements other modules.

FIG. 2 provides additional detail regarding one implementation of thepresentation architecture. Many components of the presentationarchitecture are numbered as in FIG. 1: the application and userinterface 101, the application controller 103 and real-time applicationservices 109. In this schematic diagram, the retirement income planningWeb top 116 is the thick client and the Internet explorer 217 supportsthe thin client. The Web top 116 communicates using SOAP and HTTPS 211with the application controller 103. The Internet explorer 217communicates using HTTPS 213 through a Web application 215 with theapplication controller 125. The Web application 215 reformats data fromthe Internet explorer 217 to match data from the Web top 116 and uploadsJavaScript, applet or similar components to the Internet explorer 217.The application controller interacts with an object model schema 223 anda presentation server 221. The object model schema may be written inXML. It defines data and rules for associations among data elements. Thepresentation server accesses presentation forms 225 and applicationscripts 227 that define the interaction with the user and presentationlogic.

FIG. 3 presents the software architecture without explicit demarcationof the corresponding hardware. To some extent, parallel numbering withFIG. 1 has been applied. To the extent that there are any discrepanciesbetween FIGS. 1 and 3, the figures should be taken as alternativeembodiments. In one embodiment, the Web top 116 is implemented as a Javaswing client. The Web top 116 interacts via requests and responses withthe application controller, which acts as a mediator 125. The mediatoralternatively allows an HTML client 117 to interact by requests andresponses. Money machine data 127 in this figure includes both clientinformation and financial plan information. Money machine data 127 maybe updated by the mediator 125 responsive to client interaction, byconfiguration management 142, by data integration 105 or by user controlmanagement 305. Monte Carlo simulation data is updated by data support111, which may include processes for data assembly, calculation andcollection. In turn, the simulation data is used by the simulator 132 toproduce data objects that are persisted in a data object store 301. Themediator 125 can invoke either the simulator 132 or solver 130. Resultsfrom the solver can be used in simulation. The mediator also can invokethe report output generator 131, which accesses the data object storeand the results of simulation. The report output generator utilizes arendering server 302, which may invoke a charting server 303 and returna report to the mediator 125. The data support module 111 also updatesthe money machine data 127. Monitoring and reporting 140, 141 interactwith data delivery 143.

Use Cases and Interfaces

FIG. 4 is a high-level schematic of a use case, proceeding from creationof a household through creation of a client report. This use caseinvolves one or more sessions and interaction with the client, analystor both. The system is security protected, so access begins with a login401. Creation of a household 402 includes description of householdentities, assets, liabilities and goals. Household entities include theprinciples and related persons. Principals and assets have tax relatedinformation. In some instances, principals have trusts or businesses.

Assets include human capital, captured as a future wage scenario,optionally with factors reflecting potential disruption of employment,and more traditional financial assets, such as insurance, eligibilityfor Social Security and pensions, and holdings of stocks, bonds and realproperty. Accounts are set up, assets added to accounts and assetssummarized in varying degrees of detail by a lifetime resources andclaims statement. Liabilities include deferred taxes, mortgages andother debts. Deferred taxes can be inferred from the basis informationand account type information for various assets. Goals include some orall of the retirement goals, paying down a mortgage on the family home,retiring other debts, putting a child through school, donating tocharity, leaving a bequest, and supporting a family member who no longerresides with a household. Goals are presented in pull-down menus,wizards or dialogs as concrete objectives, rather than as abstract cashflows.

Employment Related Resources

Employment related resources include human capital, equity basedincentive compensation, defined benefit plans and social security. Humancapital refers to the capitalized value of future salary. Equity basedcompensation covers the various schemes companies develop to compensateemployees based on the performance of the firm's equity (for instance,employee stock options.) Defined benefit plans are basically a mechanismfor deferring receipt of salary income to a future period (typicallyonce the employee has retired.) Social security is a governmentsponsored defined benefit plan.

Earning potential is a function of education, life experience asrevealed by current employment role and career plans. Immediate earningcapacity is shown by current salary and expected salary progression. Thestability of the current job also needs to be considered and thedifficulty of replacing that job should it be lost. For individualscurrently seeking employment, the relevant data would be the expectedlength of the search process and the characteristics typical of the jobsought. Earning potential is limited by plans for full or partialretirement. However, we consider those plans in the goal section ratherthan the resource section. The input data for evaluating earningpotential may include:

Label Type Contents Person person employed person Education choicehighest educational degree Currently Unemployed check true if unemployedExpected length of integer expected length of unemployment time untilreemployed Type of Employer choice type of organization at whichemployed Business Sector choice economic sector in which employed Tickersymbol employer's ticker symbol Stability of Employer's choiceoperational stability Operations of employer Effect of General choicesensitivity to business Economy cycle Role at Employer choice job typeYears at Employer integer years at this employer Job Security choiceappraisal of job security Ease of replacing job at choice assessment ofcurrent salary difficulty of replacing the job Likely length of integertime to find a new job unemployment Potential Paycut float salaryreduction in new job as percentage of current job Current Base Salaryinteger current base pay Bonus float typical cash bonus as percentage ofbase pay Bonus tied to personal percentage fraction bonus tied toperformance personal performance Bonus tied to firm percentage fractionbonus tied to performance firm performance Salary Progression choiceexpected progression in salary Seniority increase percentage annualpercentage increase in salary due to seniority Seniority cap integerlevel at which seniority increases are likely to halt

Education choices may include none, primary school, secondary school,technical college, two-year college, four-year college, graduatebusiness degree, professional degree, doctorate, postgraduatespecialization. Type of employer may be government, public businesscorporation, private business corporation, endowed institution,unendowed institution, small business, professional partnership, andself-employed. Stability of an employer's operations are classified asvery stable, stable, moderately stable, or not stable. Sensitivity tothe business cycle is classified as not effected, somewhat effected, orstrongly effected. Role at employer is classified as staff, professionalstaff, manager, executive, senior executive, or proprietor. Job securityis classified as very secure, secure, uncertain, and not secure. Ease ofreplacing the job is classified as easy, not difficult, some difficulty,might not be possible. Salary progression is classified as stable, costof living increase, seniority and cost of living increase. Seniorityincrease and cap are grayed unless seniority and cost of living increaseis selected for salary progression.

The lifetime resources and claims statement presentation of humancapital may be:

-   -   Insured Value    -   Uninsured Value    -   (Job Security Adjustment)    -   Net Value    -   memo: bonus percentage        Assume partial retirement and full retirement occur at their        target dates. Take full salary to be base plus bonus. If        currently employed, project forward the full salary taking into        account planned salary progression and any period of partial        employment. One may calculate salary progression as:    -   Stable: No change in salary    -   Cola: Salary escalates annually by inflation rate    -   Seniority: Let r be the sum of seniority rate and inflation        rate. Each year increase salary cap by inflation rate. Increase        salary by rare r until it hits cap, then keep it equal to cap        (which continues to receive a cola.)        To give effect to partial employment, calculate the full        employment value and then multiply by the percent employed        fraction. If unemployed, propend a search period of zero income,        and then project forward. Let r denote the age at which death        benefits terminate. Denote the present value of full salary in        years up to τ discounted at the risk free rate as P₁. Denote the        actuarial present value of these salary years as P₂. Denote the        sum of death benefits payable under term and whole life        insurance as P₃. Let P₄ be the lesser of P₁ and P₃. Then P₄ is        the insured value. Let P₅ denote the actuarial present value of        salary for years after τ. Let P₆=P₅+max(0, P₁−P₄), this is the        uninsured value. Let P₇=P₄+P₆. If job security is not secure,        then repeat the calculation assuming immediate unemployment for        the indicated length of time and adjusting salary down by the        paycut. Denote by P′₇ the quantity analogous to P₇ calculated in        this way. Let P₈=P′₇−P₇. If the job is not secure, P₈ is the job        security adjustment. If job security is uncertain, then the        adjustment is 0.5P₈. Otherwise the adjustment is zero. The net        value is the sum of insured value, uninsured value and job        security adjustment. The bonus percentage is bonus as a        percentage of full compensation.

In simulation, a monthly salary cash flow can be calculated in theamount

$\frac{\chi}{12}\left( {{base} + {bonus}} \right)$where χ is the employment fraction (1 during full employment, lessduring partial employment, 0 when unemployed or retired). Assume aninitial period of unemployment lasts the expected length of time andthat partial and full retirement occur at the expected dates. Asimulated death terminates salary.

Payment of bonuses is uncertain and, therefore, may be simulated,preferably consistent with simulated economic conditions. Let φ₁ be thetypical bonus as a percent of base; let φ₂ the part tied to personalperformance; let φ₃ be the part tied to firm performance. Letφ₄=1−φ₂−φ−3. Let S(t) be the base salary in year t. For an employerwhich is a public company, let u₁(t) be 0 if the return is negative inyear t and 1 otherwise. For other employers, use the return to the stockmarket index instead of the return to the stock to define u₁(t). Letu₂(t) be a coin toss taking on the values 0 and 1 equally often. Thenthe bonus in year t is[0.85φ₁+φ₂ u ₁(t)+φ₃ u ₂(t)]μφ₁ S(t)whereμ=0.85φ₁+0.66φ₂+0.5φ₃

Incentive Compensation

A variety of schemes have been devised, chiefly for compensatingexecutive employees, either based on stock performance or through grantsof stock. Goals of these programs are to align the economic interests ofthe employee and the firm and to encourage employees to remain at theiremployer. As a result, the schemes typically make a grant at one datebut the grant vests over time and the unvested portion is lost shouldthe employee leave the employer before vesting occurs.

Employee Stock Option

Employee stock options are options to purchase the employer's stock at astated strike price over a period of time. They acquire value if theemployer's stock price exceeds the strike price prior to the expirationdate of the option. Options are typically granted on a fixed block ofshares and some fraction of the block vests on each annual anniversaryof the grant. Options cannot be exercised prior to vesting. Employeeoptions typically expire shortly after the employee leaves employment.However, on normal retirement or death, it is usual to allow a fairlysubstantial time period between the end of employment and optionexpiration. In some cases, severance of employment for these reasons maynot change the option life from that which would apply were employmentcontinued. For tax purposes, options come in three flavors: statutory,non-statutory or incentive. Options may have a tax basis, but usuallyhave just a zero tax basis. The details of the option are spelled out bythe employer in the documentation provided to the employee at the timeof the option grant.

Input for calculations may include:

Label Type Contents Description text identifying label Grantee person towhom granted Granted date date granted Type choice Number Shares integernumber of shares optioned Optioned Security symbol ticker symbol ofunderlying Expiration date date when the options expire SpecialExpiration choice how expiration set for retirement and death SpecialExpiration integer length of special Period expiration period StrikePrice float option strike price Vesting choice how options vest levelrate float fraction grant vesting each anniversary of the grantschedule: date date vesting date schedule: amount integer number sharesvesting on date Prior Exercise integer number options in grant alreadyexercised Basis integer option basis Grant Date Value integer value ofoptions on grant dateThe stock option type may be statutory, non-statutory or incentive.Vesting is complete, level rate or schedule. Level rate may be grayedout or unavailable if vesting is not level rate. Special expiration isimmediate (options expire at once), special (options expire a givennumber of months after employment ends) or normal (options expire atnormal time.)

The lifetime resources and claims statement presentation is

-   -   Cash Value    -   Incremental Time Value    -   (Deferred Tax)    -   Net Value    -   memo: unvested amount        The effective grant is the number of shares granted less prior        exercise. Calculate the currently vested number of shares. If        fully vested, this is the effective grant. If vesting is by        schedule use the most recent date in the schedule prior to today        and subtract the prior exercised shares. If at a level rate,        then create a schedule in which a rate percentage of the        original grant vests on each annual anniversary of the grant.        Then see the prior case. The vesting ratio is vested shares        divided by effective grant shares.

The cash price of the option is the excess of the underlying price overthe strike price, i.e.max(0,market price of underlying−strike price)The time price of an option is the price calculated by the Black-Scholesformula. To apply the formula get the price and volatility of theunderlying stock. Also figure the remaining life of the option (timefrom now until expiration). If job security is secure and life isgreater than 3 years, then reduce it to 3 years. If job security isuncertain and life is greater than 18 months, reduce it to 18 months.Get the risk free rate for a maturity equal to remaining life. If jobsecurity is insecure, time price is the cash price. Otherwise the timeprice is the price returned by the Black-Scholes formula. The time valueis the time price times the vested shares. The cash value is the cashprice times the vested shares. The incremental time value is the timevalue minus the cash value.

Let φ_(v) be the ratio of vested shares to grant shares and φ_(u) be theratio of unvested shares to grant shares. Let φ_(v) times the grant datevalue be the effective grant value. Let φ_(u) times the basis be theeffective basis. Let x be the cash value. We calculate tax on vestedshares as follows:

-   -   Statutory, zero grant value: x times long term capital gains        rate    -   Statutory, nonzero grant values: y is x minus the effective        grant value. Let n be the number of years from now until one        year past the final expiration date. Let ρ_(n) be the risk free        discount factor for maturity n. Let t₁ denote o_(n) times the        ordinary income tax rate times the effective grant value. Let t₂        be the capital gain rate times y. The deferred tax is t₁+t₂.    -   Incentive: tax is equal to the AMT rate applied to x.    -   Non statutory, zero basis: tax is equal to the ordinary income        tax rate applied to x.    -   Non statutory, nonzero basis: tax is zero.        The unvested shares are the effective grant shares less vested        shares. Calculate net value as for vested shares, with one        exception. For non-statutory options, with nonzero basis make a        supplementary calculation of value based on an option expiring        on its vesting date and call the result z. Let m be the number        of years to vesting, subtract the effective basis times ρ_(m)        from z. Multiply the result by the ordinary income rate to get        the deferred tax. Here ρ_(m) is the m year risk free discount        factor. Multiple calculations are needed if the options vest        over years.

The effective grant is the number of shares granted less prior exercise.Calculate the currently vested number of shares. If fully vested, thisis the effective grant. If vesting is by schedule, use the most recentdate in the schedule prior to today and subtract the prior exercisedshares. If at a level rate, then create a schedule in which a ratepercentage of the original grant vests on each annual anniversary of thegrant. Then see the prior case. The vesting ratio is vested sharesdivided by effective grant shares. Model as a stock option on theunderlying for the vested number of shares. When executed, the treatmentdescribed below applies:

-   -   Statutory: No tax is recognized until acquired stock is sold.        The basis of the stock is the strike price of the option and the        holding period commences on option exercise.    -   Incentive: We term the price of the underlying at the time of        exercise as the exercise price. The excess of the exercise price        over the strike is known as spread. If the stock acquired        through exercise is sold within two years of the option grant or        within one year of exercise, then the spread is recognized as        SALARY income. The difference between the sale price and the        exercise price is recognized as capital gain. If this gain is        actually a loss, then it is applied first to reduce the salary        income from the spread and only the remainder is taken as a        capital loss. If the stock is not sold in the year of exercise        then the spread is recognized as AMT income, and the AMT basis        of the stock is set equal to the exercise price. If the stock is        retained past the one and two year limits, then when sold the        difference between sale and strike price receives long-term        capital gain treatment for ordinary tax purposes and the        difference between sale and AMT basis is the capital gain for        AMT purposes.    -   Non-statutory options, zero basis: When exercised, option spread        is SALARY income and basis of acquired stock is exercise price.    -   Non-statutory option, positive basis: When the option vests, let        S be its immediate exercise value and B its basis. The excess of        S over B is recognized as SALARY and the new basis of the option        is S. Note that this applies even if the option is not        exercised. If S is less than B, then no taxable event occurs at        vesting and the basis remains B. When the option is exercised,        the basis of the option (plus strike) is transferred to the        acquired shares and no taxable event occurs. The holding period        of the stock includes the holding period of the option. If the        option expires unexercised, then a capital loss equal to the        basis is realized.

An option may also be exercised for cash. This is equivalent to anoption exercise followed by immediate sale of the acquired stock. Ingeneral this results in salary income in the amount of the spread. For anon-statutory option with positive basis, however, cash exercise resultsin a capital gain with a holding period determined by the optionexpiration date.

Stock Appreciation Right

A stock appreciation award gives the employee the right to receive thedifference between the stock price on the day the employee exercises theright and a base price. Typically these rights must be exercised priorto an expiration date. Also the amount which can be paid under a rightmay be limited by a cap. As with options, a block of rights is typicallygranted at one time and then vests over a period of time.

Inputs for calculation may include:

Label Type Contents Description text identifying label Grantee person towhom granted Granted date date granted Number Shares integer number ofshares optioned Underlying Security symbol ticker symbol of underlyingExpiration date date when the options expire Base Price float base fromwhich appreciation measured Appreciation Cap float maximum price Vestingchoice how options vest level rate float fraction grant vesting eachanniversary of the grant schedule: date date vesting date schedule:amount integer number shares vesting on date Prior Exercise integernumber options in grant already exercised Basis integer option basisIn this embodiment, the vesting choices include complete, level rate orschedule. The level rate option may be unavailable or grayed out, ifvesting is not level rate.

In the lifetime resources and claims statement, stock appreciationrights are treated as ESOPs, except for the valuing of the rights. Thevalue of the right is calculated as the difference in two option values.The first option has a strike equal to the base price. The second optionhas a strike equal to the cap price.

In simulation, there is no cash flow until exercise. At exercise theright paysmax(0,underlying price−base price)Exercise occurs at expiration or when the price of the underlying hitsthe appreciation cap if not earlier. The cash flow is salary.

Performance Share Award

A performance stock award is typically tied to either a firm's revenueor earnings per share. An evaluation date and target value areestablished. If the monitored quantity exceeds the target value on theevaluation date and the grantee is still employed, then the employeereceives a block of stock. Otherwise the grantee receives nothing. Forinstance, the current earnings per share might be one dollar. The CEOwill be awarded 100,000 shares if the firm's earnings have been doubledin three years. Here, the monitored quantity is earnings per share, theevaluation date is three years after the grant date, the target value is$2 per share and the award is 100,000 shares.

Inputs for calculation may include:

Label Type Contents Description text identifying label Grantee person towhom granted Granted date date granted Number Shares integer number ofshares to be awarded Underlying Security symbol ticker symbol ofunderlying Determination date date when the award is evaluated Based onchoice quantity defining performance Base Value float base from whichappreciation measured Award Value float level required for awardThe award can be based on revenue, earnings, revenue per share orearnings per share.

Restricted Stock Award

A restricted stock grant is a block of shares granted at one time,subject to forfeiture and sales restrictions. The forfeiture restrictionestablishes a period of time in which the grant may be lost if certainconditions are not met. These conditions will generally be different foreach grant and need not concern us. The sale restriction will forbid thesale of the stock during the forfeiture period. The sale restriction mayextend beyond the forfeiture period however. The restriction couldderive from SEC rules governing stock sales by corporate insiders or itmight derive from an explicit condition in the grant. Such a conditioncould apply for either a fixed period of time (a temporary restriction)or for an indefinite period (a permanent restriction.) The tax treatmentof such grants is governed by elections the grantee makes when the grantis received.

Inputs for calculation may include:

Label Type Contents Description text identifying label Grantee person towhom granted Granted date date granted Number Shares integer number ofshares granted Underlying Security symbol ticker symbol of underlyingForfeiture Period check true if has a forfeiture period Forfeiture Endsdate date forfeiture period ends Restriction choice describesrestrictions Restriction Ends date date restrictions end Section 83bElection check true if section 83b tax election was made Basis integertax basis if section 83b election madeChoices for restrictions are insider trading related, indefinite termand restriction ends date.

Defined Benefit Plan

Defined benefit plans are pension arrangements established by employersfor employees. The benefit paid under the plan is related to the lengthof the employee's service. Accordingly, we distinguish between activelife plans and retired life plans. An active life plan is one where thebeneficiary is still working for the employer sponsoring the plan andthus has the opportunity to increase his ultimate benefit level. Aretired life plan is one where the employee has left the employer andthe benefit level is thus frozen. The structure of benefits typically iseither an annuity product or a lump sum payment. Because the benefitstructure is the same for all pension participants, there is not thesame ability to tailor the annuity benefit to individual circumstancesas occurs with life insurance products. Lump sum payment plans seek toovercome that difficulty by paying out the accumulated plan value at onetime and then leaving it up to the beneficiary to purchase theindividually tailored annuity benefit from a third party life insurancecompany.

For active employees one needs to know how the benefit is determined andthen estimate what benefit will be earned. We take the basic benefitformula to bemaximum benefit=benefit multiplier×benefit baseThere are several popular schemes for establishing the benefit base:

-   -   the benefit base is a fixed dollar amount    -   the benefit base is the number of years of employment    -   the benefit base is the salary in the final year of employment    -   there is a integer constant N and the benefit base is the        average salary over the last N years of employment    -   the benefit base is the average salary over the entire period of        employment        The vesting proportion is typically determined by a schedule        which relates the number of years of employment to a proportion.        The actual benefit is        actual benefit=vesting percentage×maximum benefit        Once the actual benefit amount is determined, there are two ways        of delivering it: It may be paid out as a lump sum; or it may be        paid as a life annuity, either over the employee's life or over        the joint life of the employee and the employee's spouse        (possibly with a reduction in the benefit on the death of either        party).

There is also a timing issue with the benefit as to when it is paid (orwhen it begins paying, in the case of the annuity). The payment timecould be either retirement or the latter of retirement and a specificage. Several examples serve to illustrate this arrangement.

In one instance, for employees with at least 20 years of service, thebenefit is 72% of final salary. For employees with more than 25 years ofservice, the benefit is 80% of final salary. In either case, the benefitis paid annually for the rest of the employee's life beginning at age65. Here the benefit base is final salary. The benefit multiplier is 0.8(since the maximum benefit is 80% of final salary). The vesting scheduleis

years of vesting service proportion <20 0 20-25  90% >25 100%Here, the vesting proportion for years 20-25 follows from 72%=90% of 80%where the 80% is the maximum benefit proportion. The payment method is alife annuity on a single life commencing at age 65.

Alternatively, the benefit may be $10,000 for every year of service paidas a lump sum on retirement to all employees with at least 5 years ofservice. Here the benefit base is the number of years of service. Thebenefit multiplier is $10,000. The vesting schedule is

years of vesting service proportion <5 0  5+ 100%The payment method is lump sum and the timing is retirement.

Another arrangement is a benefit of 5 times the average salary in thelast 5 years of employment paid as a lump sum at retirement to allemployees with 20 or more years of service. The benefit base is theaverage salary over the last N years with N equal to 5. The benefitmultiplier is 5. The vesting schedule is

years of vesting service proportion <20 0  20+ 100%The payment method is lump sum and the timing is retirement.

Note that some benefit formulas are very complex and may not be reducedto the form given here. In this case, one should estimate what thebenefit is likely to be, take this amount as the benefit base and setthe benefit multiplier to one. The vesting schedule may be taken as

years of vesting service proportion >0 100%For retired lives, the benefit is fixed. It is either a lump sum to bepaid out at a date certain or an annuity since lump sums paid atretirement will already have been received by the retired employee.

For the active plan (i.e. worker still employed), input fields may be:

Label Type Contents Description text identifying label Employee personemployed person Benefit Base choice base for benefits Number Yearsinteger number of years off which recent pay average calculatedMultiplier float multiplier of the benefit base schedule: year integeryear of employment schedule: vested float percent maximum benefit vestedstart of employment date when employment began history: year integercalendar year history: salary integer salary payment choice how benefitis paid at choice when benefit paid age integer age at which paidHere, the benefit base is fixed dollar, years of employment, final pay,recent years and total pay history. Number years is grayed out andunavailable unless recent years is the benefit base. The history fieldsare grayed out unless recent years or total history is selected. Paymentmethod is lump sum or annuity. Date is retirement or age. Age is grayedunless at is age. If the payment method is annuity then the annuitydetails (as for the fixed annuity) should be given. For the alreadyretired employee, the fields may include:

Label Type Contents Description text identifying label Employee personemployed person Payment choice how benefit is paid lump sum: Date datedate when paid lump sum: amount integer when paidIf the payment method is annuity, then the annuity details are given asfor the fixed annuity.

Lifetime resources and claims statement: We suppose employment began att=0. We let t=t′ denote now. Suppose first that employment continuesuntil final retirement at t_(f)=t′+n. Let S(t) denote salary at time t.If the prior salary history is given, use it. Otherwise, estimate it asS(t)=S(t′)I(t)/I(t′) where I(t) is the CPI-U index at time t. For thefuture salary progression, use the provided data, or else forecast it asS(t)=S(t′)/I(t)/I(t′). Let B denote the benefit base. If the base isbased on final salary then B=S(t_(f)). If it is based on n years then

$B = {\frac{1}{n}\left\lbrack {{S\left( t_{f} \right)} + {S\left( t_{f - 1} \right)} + {S\left( t_{f - 2} \right)} + \ldots + {S\left( t_{f - n + 1} \right)}} \right\rbrack}$If the base is a fixed amount then B is that amount. If B is years ofemployment then B is t_(f) times the multiple. Let A denote the benefitamount, it is generally a multiple of B. Let V₀ denote the value of thebenefit. If the pay-out is a lump sum, the V₀ is the present value of Adiscounted at the risk free constant dollar rate. If the payout is anannuity, project the annuity payments and subtract applicable tax. Ifthey are subject to cola, then discount them at the constant dollar rateto the present. If they are not, then use the dollar discount rate todetermine the lump sum equivalent value at retirement and discount it atthe constant dollar rate to present. The calculation of V₀ assumes thebenefit is fully vested. Let V₁ be the value V₀ multiplied by theappropriate vesting fraction. Next repeat all the calculations assumingimmediate retirement and denote the result by V₂. Then U=V₁−V₂ is theunvested portion. Show V₁ as final benefit, the unvested portion U as asubtraction and V₂ as the value of the currently vested benefit.

For retired lives, the benefit is an annuity with a current value andwith or without cola. Discount it using the risk free dollar or constantdollar rate to get the present value. It is fully vested so there is nounvested amount.

Simulate the salary as in human capital. Apply the benefit formula andvesting schedule to determine the benefit. No tax events occur prior todistribution. If distribution is lump sum, assume it is rolled into atraditional IRA account with zero basis. Otherwise, treat it asconverted to an annuity.

Social Security

Social security is a government sponsored defined benefit plan where thebenefit is based on a weighted average of the employee's entire lifetime earning history. The benefit is paid as a joint life annuity overthe lives of the employee and the employee's spouse. The benefit isreduced on the death of the employee and is adjusted annually forinflation. The maximum benefit is earned at age 70 and a vestingschedule covers benefits which are commenced at an earlier age. Thebenefit is also capped so that even if a higher benefit should becomputed based on the salary history, only the maximum allowed benefitwill be paid. When partial retirement generates income that reduces themaximum allowed benefit, the benefit is capped accordingly. The abovedescribes the core pension benefit provided by social security. Thesocial security program provides a complex array of additional benefitswhich may be earned (for instance disability insurance). However, weshall not discuss those additional benefits here. The Social SecurityAdministration provides both a website and an annual benefit statementfrom which one may estimate one's future benefit. For active lives weshall suppose that those estimates are used. For retired lives, thebenefit is established by the monthly benefit payment. If both partnersin a marriage have worked then the benefit paid will be, while bothparties are alive, the greater of the two individual benefits, and afterthe death of one party, the greater of the survivor's individual benefitand the survivor benefit of the decedent's individual benefit. Thesurvivor benefit is generally 80% of the decedent's individual benefit.For active lives, useful information includes the expected annualbenefit and the age at which one expects to begin drawing thosebenefits. For retired lives, useful information includes the actualmonthly benefit being paid and what the benefit will become after thedeath of a party.

During employed life, the input fields may be:

Label Type Contents Description text Identifying label Insured personcovered person Benefit Start choice when benefits first drawn Startingage integer age at which benefits first drawn Expected Benefit choicebenefit expected Benefit Amount integer monthly benefit amountThe benefit start choice may be retirement or age. Starting age may begrayed out if benefit start is not age. Expected benefit is a maximum oramount. Benefit amount is grayed out if expected benefit is not amount.During retired life, the input fields may be:

Label Type Contents Description text Identifying label Insured personcovered person Benefit Amount integer current monthly benefit amountSurvivor Benefit integer amount paid to the survivor of the coveredperson

The lifetime resources and claims statement may project the annuityvalue, subtract tax and discount it at the constant dollar rate to getits present value. The result is the promised benefit. If thebeneficiary was born on or before 1950, then this is also the estimatedbenefit. Otherwise multiply the promised benefit by a factor and labelthat as the unsecured benefit. Subtract the unsecured benefit from thepromised benefit to get the estimated benefit. This computation reflectsthe fact that the current program is actuarially underfunded and islikely to be reformed. As we do not know the nature of the reform weshow a conservative estimate of the likely value to be realized as theestimated benefit.

In simulation, from benefit start until the first death, a monthlybenefit is paid. The monthly benefit is determined by dividing theannual benefit by 12. The annual benefit is adjusted at the start of theyear for the change in CPI over the last year. After the first death,the survivor fraction is paid until the second death. This is like anindex linked fixed annuity with survivor benefit.

General Financial Assets

A wide variety of general financial assets may be recognized inretirement planning model. They include portfolios and cash assets, suchas bank assets, checking accounts, market rate accounts, savingaccounts, certificates of deposit, money market accounts, and Treasurybill accounts. They include fixed income assets, such as saving bonds,fixed rate bonds, floating rate bonds, indexed bonds, and convertiblebonds. They include equity and derivative securities, such as preferredstocks, common equity, partnerships, warrants, incentive compensation,options, and futures. They include investment funds such as ETFs, closedand open end mutuals, unit trusts, and hedge funds. They also includeprecious metals, collectibles, insurance products, pensions, definedbenefit plans, social security, private investments, mortgages, fixedrate bonds, floating rate bonds, indexed bonds, convertible bonds,preferred stocks, common equity, partnerships, warrants, trust,inheritances, family support and tax assets.

Real Property

Real property and private investments have not been adequatelyconsidered and modeled in retirement planning. Real property is acategory which includes all forms of property investment from familyresidences through vacant lots to rental units. The salientcharacteristics of this investment category are pricing, mortgages,liquidation plans, rents, costs and tax treatment.

In general, recent market prices for real property are unavailable.Thus, these properties are valued on an appraisal basis. The appraisalprocess basically involves comparison with similar properties which wererecently sold so as to get an estimate of the property's likely marketvalue. The model can use a current appraisal value if available.Otherwise, it will take the most recent value—either market orappraisal—and update it based on price indices for comparable property.For this purpose, considerable descriptive data can be used to determinethe comparable property. By an appraisal value, we mean the value a realestate agent would estimate as the current market value of the property,as opposed to the valuation that a tax assessor or insurance agent wouldput on the property. Insurance and tax valuation generally follows amore conservative methodology than market valuation, which may be used,but are not preferred.

Real property is often encumbered with mortgages. The details of thesemortgages should be taken into account. Also, real property is noteasily liquidated. Thus, the investor's plan for liquidating theproperty should be spelled out. If the property is being rented, thenadditional detail about the rents and tax accounting for the property isuseful. Costs affect the investment return of this asset even if it isnot rented. Tax rules cover a wide range of real estate situations anddepend on a fair degree of detail.

We give here an overview of the basic data useful to describe realestate.

Description: We can describe real property in terms of the use theinvestor makes of the property (e.g., primary residence, pureinvestment, etc.), the type of structure built on the property, andwhether the property is located in a city, suburb or rural area; and/orthe zip code of the property.

Mortgages: A mortgage has descriptive data and terms. The descriptivedata includes whether the mortgage is a first or second mortgage andwhether it is assumable and non-recourse. If the mortgage has the firstclaim to the value of the collateral, it is called a first mortgage.Additional mortgages that are subject to a prior claim on the collateralvalue to the mortgage are called a second, third, etc. mortgage. Amortgage is assumable if it may be transferred to a new property ownerwhen the property is sold. A non-assumable mortgage generally must berepaid at the time of property sale. With a non-recourse mortgage in theevent of a default, the lender's only recourse is to the mortgagedproperty. With a recourse mortgage, the lender can seek compensationfrom the borrower's total assets.

Liquidation Plans: A liquidation plan is the investor's intention withregard to how he will liquidate his investment in the property. Thesimplest plan is simply to retain the property indefinitely. The nextsimplest is to sell the property either at a fixed future date or at adate related to the investor's retirement (e.g., five years afterretirement). A partial liquidation of the investment may be achieved bymortgaging the property. Alternately, there may be a plan to rent theproperty. In particular, a long-term lease may be considered as apartial liquidation of the property.

An investor's intentions may be firm, i.e. almost certain to beimplemented, likely or expected to be implemented but could change, orvague, that is, just a provisional plan.

If an investor's plan is to retain the property, then it is worthexploring and modeling his willingness to partially mortgage or rent theproperty, as these steps retain ownership while still generatingliquidity from the property. In general, an investor might be willing togive up retaining the property either if it were necessary to realizehis overall objectives, or in an emergency to deal with untoward events,or, perhaps, not at all.

If the investor's plan is to sell the property, then that intention maybe coupled to a plan to buy a successor property. In this case, we saythat the plan is to replace the property. The description of theproperty to be purchased should be included in the investor's goalsection and should be cross referenced to the property it replaces. Itis perfectly possible for one property to be replaced by a package orfor several properties to be sold and replaced by a single property. Intax parlance, a 1031 exchange may be elected and modeled.

Where the plan is to rent or lease, the expected annual rent is needed.In the case of a rental, one also needs to know if owner occupancy ofthe property continues, and if so what fraction of the property isallocated to personal use and what part to rental use (the two uses neednot sum to one since there may also be vacancy periods). This impactsdepreciation and other tax issues.

Rents: Rents need to be described. Rental property has a special taxtreatment that is best modeled using additional detail. Rents aredescribed in terms of their current level, trend over time, variabilityand whether that variability is associated with the general businesscycle. A property may also be under rent controls that limit the annualincrease in rent.

The tax detail relates to the depreciation charges on the property.Generally tax law will classify different parts of the property intodifferent categories—for instance land, improvements, structures andappliances. On some categories, depreciation charges may be claimed,which reduces the investor's taxes. The amount of depreciation varies bycategory, the initial value in each category, the accumulateddepreciation charges taken to date for that category, when the firstdepreciation charge was taken and the method the tax payer elected toapply for calculating the depreciation charge.

Costs: The important cost categories for all properties include taxes,insurance and operating costs. Taxes may be controlled such that theannual increase is limited, which need to be taken into account whenprojecting taxes over extended periods. Operating costs reflect theannual average expense of repairs, maintenance and property managementand may increase with inflation.

If the property is rented, the portion of operating expense which iscapitalized for tax purposes should be broken out and allocated amongthe different depreciation categories. In general, these expenses areepisodic in nature, so the numbers should be based on average experienceover several years rather than a single year experience. If a detailedbreakdown into depreciation categories cannot be estimated, aconservative category allocation should be chosen.

Taxes: Primary residence, secondary residence and time-shares withrentals require an allocation between occupancy use and rental use. Ifthe property is occupied by a single tenant at a time, the allocation isbased on days of rental use and personal use in a year. As there may bedays of non-use (e.g. for resort properties), these days need not sum toa full year. If the property has multiple simultaneous occupancy thenthere is a fraction of personal use, for instance based on squarefootage, and the balance is considered rental use.

Real estate losses are generally considered passive and are subject tolimitations on deductibility. However special treatment applies to realestate professionals. These professionals may choose to aggregate theirproperties for tax purposes (this information is recorded on the taxdetail sheet). For all investors, their participation in the propertymay be material, active or passive and different levels of losslimitation will apply in each case.

For input, the fields may include:

Label Type Contents Description text identifying label Role choiceclassification as residence or investments generates rents check true ifcurrently generating rental income Type choice type of property Zip Codestring 5 digit zip code of property Locale choice type of neighborhoodValue Integer value of the property Valuation Date date when theproperty was valued Valuation Method choice how property was valued LongTerm Intention choice long term plan for the property retain in: rolechoice new role for property replace: with text identifying label of aproperty in the goal section Firmness of Intention choice how certainthe plan is Change anticipated choice when change is to be made YearInteger calendar year of anticipated change Offset Integer offset fromretirement date of anticipated change Rental Initiation check true ifintend to start renting Rent Year Integer calendar year in which rentsbegin Rent amount Integer expected rent proceeds per year Personal Usefloat fraction property deemed personal use Willingness to sell choicehow willing to sell the property Willingness to mortgage choice howwilling to mortgage the property Property Tax Integer current annualproperty tax Increase Limited check true of increase in property taxrestricted Increase Rate float maximum annual increase in taxes InsuredValue Integer value for which property is insured Premium Integer annualinsurance premium Other Operating Cost Integer annual costs of propertyother than tax and insurance Purchase date when purchased Basis Integertax basis Recourse Mortgage check true if mortgage is recourse AssumableMortgage check true if mortgage is assumable Rent Amount Integer annualrental proceeds Owner Tenancy check true if owner partially occupiesrental property Personal Fraction float fraction residency deemedpersonal occupancy Owner Use check true if owner time shares propertyPersonal Days Integer days per year owner uses property Rental DaysInteger days per year owner rents the property Rent Stability choice howstable rent is Rent Control float maximum annual rental increase if rentcontrolled Minimum Rent Integer minimum annual rent expected over nextfive years Maximum Rent Integer maximum annual rent expected over nextfive years Owner Participation choice how tax law views ownersinvolvement with the property Capitalized Operating float fractionoperating Expense expense which is capitalized Similar Depreciationcheck true if new costs will Structure be allocated to depreciationcategories same as old costs depreciation: item text identifying labeldepreciation: year Integer year expense capitalized to depreciation:method Method how depreciated depreciation: original Integer balance atstart of balance depreciation new depreciation: Method how depreciatedmethod new depreciation: float fraction new cost percentage depreciatedby this method

The “role” of real estate may be primary residence, secondary residence,time-share, or investment. Type may be chosen among detached home,townhouse, condominium unit, multi-unit dwelling, commercial, orundeveloped. Locale is urban, suburban, and rural. Valuation method ismarket or appraisal. Long-term intention is retain, retain in new role,replace, or sell. Intention is firm, likely, or vague. Changeanticipated is expressed as a year or as a retirement offset. Rentalinitiation is yes, contingent or none. Willingness to sell is yes,contingent or no. Willingness to mortgage is yes, contingent or no. Rentstability is stable, controlled, increases steadily, fluctuates witheconomy, or fluctuates independent of economy. Owner participation ismaterial, active or passive.

Lifetime resources and claims statement may present real estate as:

-   -   estimated market value    -   (principal mortgage balance)    -   mortgage cost adjustment    -   (deferred tax)    -   net equity    -   memo: cash flow value of the property        The mortgage cost adjustment could be either positive or        negative, especially in the case of swap financing. The memo        item only appears for investments and for secondary residences        and timeshares that produce rents. A zip code may be mapped to a        region. Region, locale and type may be combined to select or        derive a price index. Let I(t) denote the selected price index        at time t. Let t₁ be the previous valuation date and t₂ the        present date. Then the current estimated market value is

$M = {V\frac{I\left( t_{2} \right)}{I\left( t_{1} \right)}}$where V is the supplied value. Haircut is as usual. For a discussion ofmortgages see below. To calculate tax, we examine the investor'sintentions for the property. If the intention is to retain, then the taxis zero. Otherwise, find the target year for sale or replacement. Checkto see if the property is a principal residence in the year of sale. Ifnot, calculate gain as market value minus basis. Suppose the property isa principal residence for a qualified period. If the property generatesrents, then split its value between the rental and residentialcomponents based on the personal use fraction. Split the basis into twocomponents similarly. Calculate the gain on each component as marketvalue less basis. Then adjust the residential gain as follows. If theresidential gain is less than zero, set it to zero. If it is greaterthan zero, then look up the exclusion amount based on filing status andreduce gain by the exclusion amount, but not below zero. Recombine thetwo gain components to get the gain on the property. Check if holdingperiod at time of sale is short or long term. Calculate tax by applyingappropriate capital gain rate to gain.

Where real estate is reflected on the lifetime resources and claimsstatement depends on intentions. If the investor is willing to sell,show under illiquid. If contingently willing to sell, show undercontingent. If not willing to sell, but willing to mortgage orcontingently willing to mortgage, show under it illiquid/contingent. Ifnot willing to mortgage or sell, but willing to rent, we show the valueof the rents under income producing and the principal value underreserve. If not willing to sell, mortgage or rent we show the propertyunder reserve.

If the property is an investment, we calculate its value by the cashflow method and show the result as a memo item. If the property is notan investment and it generates rents, then we calculate the value of therents and show that value in the income generating section of thelifetime resources and claims statement. There is considerable overlapin the two calculations. The following equations can be used to projectannually the cash flow from the property and the after-tax rents.rent=(1+growth rate)×prior year rentdepreciation=sum over different items of annual depreciationmortgage principal=prior year mortgage balance−prior year mortgageserviceinterest=interest rate×mortgage principalmortgage service=mortgage amount−interestproperty value=(1+appreciation rate)×prior valueinsured value=(1+appreciation rate)×prior insured valueappraised value=(1+tax appreciation rate)×prior appraised valueproperty tax=property tax rate×appraised valueinsurance=insurance rate×insured valueoperating cost=(1+operating cost growth rate)×prior year operating costcapitalised expense=capitalized operating expense×operating costcurrent operating cost=operating cost−capitalised expensedeductible cost=depreciation+insurance+current operating costdeduction=deductible fraction×deductible costtaxable income=rent−interest−property tax−deductiontax=ordinary tax rate×taxable incomecash flow=rent−mortgage amount−property tax−insurance−operating cost−taxaftertax rent=rent−taxIf rents are stable, the growth rate is zero. If rents are notcontrolled, the growth rate is a table look-up based on region, type andlocale. If they are controlled, it is the lesser of the controlled rateand the look up rate. The mortgage interest rate may be fixed orfloating. If fixed, it is given. If floating, it is determined using atable look up for the base, to which a margin is applied. Theappreciation rate is a table look up based on region, type and locale.The tax appreciation rate is the same as the value appreciation rate, iftaxes are not limited. If they are limited, it is the lesser of theappreciation rate and the limit rate. The property tax rate is based onthe current ratio of property tax to appraised value. The insurance rateis based on the current ratio of insurance premium to insured value. Theoperating cost growth rate is the inflation rate (a system value). Ifthere is owner tenancy, the deductible fraction is one minus thepersonal use. If there is owner use, then the deductible fraction is theratio of rent days top the sum of rent and personal days. If there isneither owner tenancy nor use, the deductible fraction is 1. Oneallocates the annual capitalized expense to different depreciationclasses based on the proportions provided. If a similar depreciationstructure was selected, then one calculates proportions based on thecurrent original depreciation balances. One extends the projections overthe period from now until property sale or owner's life expectancy,whichever is shorter. If rents do not begin until a certain date, thenrents from now until that date are zero. The rental value is presentvalue of the after-tax rents using the tax free discount multipliers.The cash flow value results from applying the multipliers to the cashflow. Note that a negative cash flow value might result.

We need to calculate the tax shelter value, if any, of real estatelosses. Proceeding year by year, aggregate the cash flows generated byreal properties on the following basis. If the taxpayer is a real estateprofessional and participation is material, then aggregate allproperties (but do not include a principal residence if it does notgenerate rent).

If the taxpayer is a professional but does not aggregate, then aggregateall properties where participation is material. If the taxpayer is not aprofessional, then aggregate all properties where participation isactive. Look at the aggregated cash flows. In any years where cash flowis positive, set it to zero. In any year where it is negative, flip thesign. The result is the loss as a positive number. For professionals,compare the loss to other income and take the smaller number. Fornon-professionals, calculate an allowance. The allowance is a baseamount for incomes below a trigger and then phase out over an interval(currently $25,000 for incomes below $100,000 and phasing out by incomesof $150,000). Take the lesser of the allowance and the loss. Multiplythe result by the ordinary tax rate. The result is the tax shelter.Discount it and show the result as a tax asset (“Tax shelter value ofreal estate losses”).

In simulation, first map zip code to a region. Then combine region,locale and type to get a price index. Let I(t) denote the selected priceindex at time t. Let t₁ be the previous valuation date. Then, at time tthe market value is

$M = {V\frac{I(t)}{I\left( t_{1} \right)}}$where V is the supplied value. If the property is not an investment butgenerates rents, use its personal-use fraction f. This is given formulti-tenancy dwellings and is

$f = \frac{{personal}\mspace{14mu}{use}\mspace{14mu}{days}}{{{personal}\mspace{14mu}{use}\mspace{14mu}{days}} + {{rental}\mspace{14mu}{days}}}$for time shares. For investment properties we have f=0. When sold, gaing is market value less basis. Personal gain is fg. Determine anexclusion amount and reduce personal gain by the exclusion amount. If aloss results, set personal gain to zero. Investment gain is (1−f)g.Taxable gain is the sum of personal and investment gain. The basis isreturned as capital.

If the property generated depreciation, there can be recapture of excessdepreciation on sale. This only applies to properties placed in serviceprior to 1987 and depreciated under an accelerated method. Form 4797 isused to figure the recapture.

If the property generates rents, then we recognize the following cashflows:

Rent: If rents are stable, growth rate is zero. If rents are notcontrolled, the growth rate is a table look up based on region, type andlocale. If they are controlled, it is the lesser of the controlled rateand the look up rate.

Mortgage service: Determined by simulating the mortgage

Property tax: The appreciation rate is a table look up based on region,type and locale. The tax appreciation rate is the same as theappreciation rate if taxes are not limited. If they are limited, it isthe lesser of the appreciation rate and the limit rate. The property taxrate is based on the current ratio of property tax to appraised value.Insurance: Take the current ratio of insured value to market value andapply it to future market value to get future insured value. Theinsurance rate is based on the current ratio of insurance premium toinsured value. Apply that rate to future insured value to get futureinsurance cost. One minus the personal fraction represents the portionrecognized as the rental cost.Operating cost: These increase in line with the CPI. Multiply by oneminus the personal use fraction to get the deductible portion. Take acapitalized fraction of this and book as depreciable expense with theindicated composition. The remaining deductible portion is taken as thecurrent rental cost.Depreciation: Is calculated according to its method and shown asdepreciation.

These various cash flows are run through the tax spreadsheets todetermine the net rent income, the deductible ordinary loss (if any) andthe booked passive loss.

Private Investments

Private investments can be either debt or equity. Seller financedmortgages are perhaps the most common form of private debt. Limitedpartnership interests and small business ownership interests are theprimary forms of private equity.

Distinctive features of private investments include that informationabout the investments cannot be looked up in databases and there is noactive, liquid market for the investments. The first issue can beaddressed by having the investor provide basic descriptive informationfor the investment. The second issue means that the value of theinvestment needs to be estimated. Additionally, the plan, if any, forliquidating the investment in the future becomes of importance.

The boundaries of the private investment category are somewhat vague. Asecurity may actually be a public security that is not covered bystandard databases or actively traded. In this case, it may be moreeffectively handled in the system as a private investment. Many limitedpartnership interests are of this type. With an owner operated business,there may be a question as to whether one should view this as twoseparate relationships, as an equity interest in a private business andan employment relationship with the business, or whether the two rolesshould be treated as single relationship and treated as human capital.In deciding which approach to take, a useful criterion to consider iswhether the business has independent value which can be separated fromthe current owner. If so, it may be preferable to represent thesituation as a combination of human capital and private investment. Forinstance, a lawyer in private practice probably does not have meaningfulbusiness assets that can be sold to a third party. A bush pilot who ownshis plane could potentially sell his “flying business” (whose assetsconsist mainly of the aircraft) independent from continuing to being thepilot employed by the business. The pilot's business could be considereda private investment separate from the human capital.

We treat private mortgages by describing the underlying property andmortgage terms. For business loans and equity interests there are atleast two possible approaches. The first method first describes the firmbacking the interest and then describes the economic interest in thefirm. The second method simply describes the cash flows from theinvestment without delving into the details of how those flows areproduced. The second method is preferred where those cash flows are wellknown (e.g. royalty interests in oil production) whereas the firstmethod is preferable for investments where the flows are more uncertain(e.g. a retail store.)

For loans, whether they be mortgages or private business loans, werequire a credit assessment, given as: Almost sure, if default is mostunlikely; likely, if the debt is expected to be paid; uncertain, ifthere is more than theoretical doubt as to whether the debt will bepaid; or unlikely, if it is not expected that the debt will be paid infull and in a timely fashion. If the debt is unlikely to be paid, thenan estimate should be made of what salvage value will actually bederived from the investment. This is basically the sum for which theinvestor would be willing to sell the claim to a third party.

For private mortgages and loans, we assume the investor's intent is tohold to maturity and we show such interests in the income producingsection of the balance sheet. The lifetime resources and claimsstatement presentation of these items is

-   -   principal value    -   interest rate adjustment    -   (credit adjustment)    -   (private market adjustment)    -   net value

Private Mortgage

Private mortgages are described by an abbreviated property descriptionand the mortgage terms as for real property and a credit assessment.

Input for calculations may include:

Label Type Contents Description text identifying label Role choiceclassification as residence or investments Type choice type of propertyZip Code string 5 digit zip code of property Locale choice type ofneighborhood Value integer value of the property Valuation Date datewhen the property was valued Valuation Method choice how property wasvalued Senior debt integer prior claims on mortgaged property Creditassessment choice assessment of credit quality Salvage Value integerestimate of recovered value in a foreclosureThe role for a private mortgage may be primary residence, secondaryresidence, timeshare, or investment. Type may be detached home,townhouse, condominium unit, multi-unit dwelling, commercial, orundeveloped. Locale is urban, suburban, or rural. Valuation method ismarket, or appraisal. Credit assessment is almost certain, likely,uncertain, or unlikely.

On the lifetime resources and claims statement, the principal value isthe current mortgage balance B. Value the mortgage using the currentrisk free rate structure, calling the result V. Let V′ be B plus theprepayment penalty. If V>V′ then let V=V′. Then V−B is the interest rateadjustment. Next we make a credit sensitive valuation C. For thispurpose assign a credit rating to the debt based on the creditassessment as

Assessment Rating almost certain AA likely BBB uncertain B unlikely CIf the rating is C, then set C to the salvage value. Otherwise, projectthe cash flows and discount the using the interest rate for that creditrating and take the discounted value to be C. LetS=max(0,(0.95×value)−senior debt)be the effective security value. If the result is greater than B thenset S=B. If C is less than S set C=S. If C is greater than V the creditadjustment is zero, otherwise it is C−V. The private market adjustmentis zero if the rating is AA or C. It is 5% of B if the rating is BBB andit is 15% of B if the rating is B.

Private Firm

The description of a private firm depends on a combination of financialstatements and analytic judgments

It is typical for debt holders to have access to only partial financialstatement information. Accordingly, we give a full and abbreviated form.The abbreviated form is

Label Type Contents Date date financial statement date Revenue integerannual revenue Operating Earning integer annual operating earningsInterest integer annual interest payments Assets integer total assets onstatement date Senior Debt integer senior claims on assets Debt integerother debt claimsThe full form is

Label Type Contents Date date financial statement date Revenue integerannual revenue Operating Earning integer annual operating earningsInterest integer annual interest payments Taxes integer income taxlevied at firm level Preferred Dividend integer preferred dividends paidProfit integer Profit to common Common Dividend integer common dividendpaid Assets integer total assets on statement date Senior Debt integersenior claims on assets Debt integer other debt claims Preferred equityinteger face value of preferred equity Common Shares integer number ofcommon shares or partnership units

Besides its most recent financial statement, a firm is also described bycertain descriptive and analytic detail. The descriptive detaildescribes the business and its sensitivity to the business cycle.Analytic detail is a view on the firm's ability to continue in businessand grow. The assessment of whether the firm is a going concern or notis based on the following tests. A going concern is consistentlyprofitable and able to attract capital on commercial terms from thirdparties. An uncertain business is marginally profitable or consistentlyunprofitable but with current cash adequate to fund operations forseveral years. A not a going concern is not profitable and dependent oncapital provided by affiliates.

Input for calculations may include:

Label Type Contents Description text identifying label Industry industryindustry in which active Impact of Business choice how sensitive firm isto Cycle the business cycle Going Concern choice whether firm is a goingconcern Business Prospect choice growth prospectsImpact of the business cycle is slight, moderate, average or severe.Going concern is going concern, uncertain, or not a going concern.Business prospect is stable, growing, fluctuating, or declining. To thisdata the latest financial statements would be attached.

Private Business Loan

Input for calculations may include:

Label Type Contents Description text identifying label Credit assessmentchoice assessment of credit quality Salvage Value integerOn the lifetime resources and claims statement, the principal value isthe current balance B. Value the loan using the current risk free ratestructure, calling the result V. Let V′ be B plus the prepaymentpenalty. If V>V′ then let V=V′. Then V−B is the interest rateadjustment. Next, we make a credit sensitive valuation C. For thispurpose, assign a credit rating to the debt based on the creditassessment in a range such as AA, BBB, B or C. As above, if the ratingis C, then set C to the salvage value. Otherwise, project the cash flowsand discount the using the interest rate for that credit rating and takethe discounted value to be C. If C is greater than V the creditadjustment is zero, otherwise it is C−V. The private market adjustmentis zero if the rating is AA or C. It is 5% of B if the rating is BBB andit is 15% of B if the rating is B.

Private Equity

This term covers partnership, preferred and common stock interests. Asecurity convertible into such an interest requires that the equity bedescribed as well. Unlike private debts, we take note of the investor'splans for liquidating the investment. The level of control over the firmexercised by the investor is also an additional datum that may becollected. Control is described as Full when the investor is presumed tohave full control over the firm, including the ability to liquidate it.It is operational when the investor can control the disposition of thefirm's cash flows, but may not be able to liquidate it. It is minoritywhen the investor does not have a control interest but does have votingrights. The investor who has no voting rights has no control. Theinvestor's estimate of the value that could be realized in a liquidationof the investment is also used. For these purposes, it is useful todistinguish between an abrupt liquidation and a planned liquidation.Often there will be little or no value available in an abruptliquidation, but some value may be realizable in a properly plannedliquidation. Liquidation here refers to liquidation of the investment,not liquidation of the firm as a whole.

Input for calculations may include:

Label Type Contents Description text identifying label Estimated Valueinteger value of interest Valuation Date date when valued Fraction onfloat fraction available on Demand demand Intention choice intentionwith respect to the investment Liquidation Year integer year of plannedliquidation Control Choice degree of control the investor exercisesIntention is sell, contingent or retain. Control is full, operational,minority or none.

The interest is shown on the lifetime resources and claims statement atits estimated value in a statement section corresponding to theinvestor's intentions.

Cash Flow Method

In the cash flow method, we ignore detail about the entity generatinginvestment returns and just consider the income and principal flows itgenerates. One of several methods is chosen for describing future flows:an annual schedule; a current value and a progression; or a formula ofthe formbase+multiplier×indexThe tax character of the income and losses is given. If the investmentis not self liquidating, then details of the liquidation plan should begiven.

Input for calculations may include:

Label Type Contents Description Text identifying label income: classlabel income classification income: weight float fraction of income ofgiven type basis integer tax basis Form Choice form of input schedule:year integer year paid schedule: income integer income paid schedule:principal integer principal paid progression: start integer year incomefirst paid progression: base integer income paid in first yearprogression: rate float annual change in income progression: cola Checktrue if income adjusts to inflation progression: end integer year soldprogression: value integer estimated value when sold formula: startinteger year income first paid formula: base integer base value formula:multiplier float multiplier formula: index price index index formula:end integer year sold formula: value integer estimated value when soldIncome: class lists the different tax classifications of income. Form isschedule, progression or formula.

For the lifetime resources and claims statement, consider first theschedule. Expand the income column into positive income, ordinarylosses, capital losses and passive losses. This division is based on theincome weights and whether the income is positive or not. Calculate theblended tax rate and apply it to the positive income to get after taxincome. Reduce basis by any principal payments prior to sale. Subtractadjusted basis from final value to get gain. If gain is negative,include it as capital loss. Otherwise, apply the capital gain rate andinclude the result as after tax income. Include the adjusted basis inprincipal. Combine after tax income and principal payments to get aftertax cash flow. Discount at the after tax rate and show in the incomegenerating section of the balance sheet. Multiply ordinary losses by theordinary tax rate and discount at the after tax rate. Show the result asa tax shelter asset on the balance sheet. Sum capital losses, multiplyby the long-term capital gain rate and multiply by the discount factorfor the year of sale. Show on the balance sheet as a capital loss taxasset. Treat passive losses similarly, using the ordinary tax rateinstead of the capital gain rate, and showing on the balance sheet as apassive loss asset. For progression and formula, generate a schedule andthen see the prior case.

Concrete Objectives

Here, we return to using concrete objectives as a means of elicitinginformation that is difficult for many users to express, followed byautomatically translating the concrete objectives into models orconstraints suitable for simulation. For instance, the goal of putting achild through college can be presented with a starting date and endingdate, a degree to be obtained, a current cost of tuition, room andboard, a school classification and a goal for paying all or less thanall of the costs, as illustrated in FIG. 5. The server-side system or athick client uses some or all of the start date, the degree to beobtained and the school classification to look up and apply aneducational inflation index and, in turn, to determine the future costsof obtaining the degree. Optionally, the educational institution couldbe identified by name and the system could look up some or all of theschool classification and current cost of tuition, room and board. It isuseful to apply an educational inflation index, instead of the ConsumerPrice Index, because educational expenses typically rise more quicklythan general expenses. Putting a child through college during aparticular span of years at a particular school is an example of aconcrete objective. This goal is more readily described by most parentsas a concrete objective than as a cash flow required to accomplish thegoal.

FIG. 5 further illustrates entry of an educational expense goal, as aconcrete objective rather than a cash flow. This example depicts payingfor boarding school for a granddaughter. A descriptive name for theeducational goal is entered 501. The beneficiary 502 is identified fromamong individuals entered during the household setup process. Becausethe household has more than one principal, a donor type 503 is specifiedand, optionally, a specific donor identified. Funding 504 may come frompersonal or joint assets of the principals. There are many familyconstellations that may lead to the use of individual assets for certaineducational goals. The length of program 505 is specified, along with astart date 506. Optionally, the institution and degree 507, 508 may bespecified. Annual costs of tuition and board are entered 509, 510, andin current amounts, which the system will automatically adjust to futuredollars. As described above, these amounts may be derived from theinstitution name and degree. The grandparents set funding targets 511,including minimum, target and maximum levels. These alternative levelsof goal fulfillment are useful when balancing goals. In addition to thefields indicated, an institution type may be identified or may be lookedup based on the institution name.

Returning to FIG. 4, creation of household goals 402 and balancing thosegoals 403 further involves setting priorities among goals and alternatelevels of accomplishing goals. For instance, having a minimum incomelevel during retirement and paying for half of a child's collegeeducation may be primary goals. Having additional income duringretirement and paying for all of the child's college education may besecondary goals. A significant charitable donation may be an additionalgoal. General wealth accumulation may be a residual goal. Some goals,such as retaining the family home, may be subject to economic conditionsand general need. Such goals may be contingent. Balancing of goalsfurther may involve timing of partial and full retirement. A goal may beto retire as early as possible or in a span from five to 10 years hence.Retirement may mean partial retirement with a reduced income until acertain age. Another goal may be to sell the family house and buy aretirement house two years after full retirement. Once goals initiallyhave been set, simulations can be run to test whether the goals arebalanced. Unachievable and overly modest goals are adjusted during abalancing stage 403.

Claims in General

Claims consist of debts and goals. Whereas assets produce wealth(hopefully), claims consume wealth. With debts, the pattern ofconsumption is fixed by the terms of the loan. For goals, the pattern ofconsumption is determined by the consumption policy of the simulation.Let φ represent a certain simulation path, t a simulation time and n≧0will represent a number of months after t. For i=1, 2, 3 we have threequantities C_(i)(n,t,φ) termed the minimum, target and maximum spendsrespectively. Here C₂(n,t,φ) is the best estimate based on the factsavailable at time t along φ of the spend at time t+n along φ. The actualspend at time t+n will lie in the interval [C₁(n,t,φ),C₃(n,t,φ)]. ThusC₁(n,t,φ) represents the required or baseline spending at time t+nwhereas C₃(n,t,φ) represents a ceiling on spending for that goal. Fordebts there is no choice in the spending and soC₁(n,t,φ)=C₂(n,t,φ)=C₃(n,t,φ). For goals, one hasC ₁(n,t,φ)≦C ₂(n,t,φ)≦C ₃(n,t,φ)and equality often does not apply.

For each claim, a number of fields are provided that determine thequantities C₁(n,t,φ). With debts, the cash flow is a deterministicfunction of time t. For some goals, spending depends on the absolutetime. For other goals, however, spending is defined relative to anevent, and the timing of the event may differ from one simulation pathto another. For instance, we might have a goal of making a certainexpenditure five years after we retire. In general, the date ofretirement for path φ will be determined by the retirement policy. Theprincipal events determining the timing of goals are the dates ofpartial and full retirement. The partial retirement date is defined asthe first date at which a member of a household becomes partiallyretired. The full retirement date is the date at which the last memberof the household fully retires. The full and partial retirement dates ofindividuals are determined by the data described in the section on theretirement timing goal below. We write C_(i)(n,t,φ,e) to indicate thedependence of cash flows on the retirement dates e.

Among the data which typically appears in the definition of goals are:

-   -   Owner: A goal may be owned by both members of a household or by        a single member. Normally a goal terminates on the death of the        owner. However, if the goal terminates on a date, then it may be        specified to continue past the death of the owner.    -   Beneficiaries: Goals which involve spending in favor of an        individual normally terminate on the beneficiary's death but may        be specified to continue (basically with a new beneficiary        stepping into the shoes of the deceased beneficiary).    -   Amount: Goals typically provide minimum, target and maximum        parameters from which the three spending levels are determined.    -   Timing: For some goals, flexibility about timing is expressed.        The target date is the date currently planned on. The earliest        date is the date to which the user would bring the goal forward        if resource levels permitted. The latest date is the date by        which the goal must be accomplished even if resources decline.    -   Time units: Often start and end dates of goals may be stated in        terms of absolute time or event relative times.    -   Inflation adjustment: Some goals call for mandatory adjustment        of spending amounts to reflect inflation. Others optionally        provide for such adjustment and still others make no adjustment.        Where adjustment is called for, typically the CPI is used in the        adjustment, but sometimes other price indices are used. In        general the choice of index depends on the particular goal to be        adjusted. Where a goal calls for inflation adjustment, the        following procedure applies. First the cash flows C_(i)(n,t,φ,e)        are determined in constant dollars of epoch 0. Let I(t,φ) be the        current value of the price index at time t along path φ and let        μ be the mean annual rate of increase in the inflation index.        Then the adjusted values in dollars are        C _(i)′(n,t,φ,e)=(1+μ)^(n/12) I(t,φ)C _(i)(n,t,φ,e)

Describing claims may include a funding field. This field determineswhether the spending called for in this claim is funded out of allassets of the household or only out of assets belonging to one oranother members of the household.

Claims provide a basic interface. In our description of this interface φrepresents a particular simulation path and t is time along this path.Thus t=0 corresponds to now, and so is a common point for all paths. Wehave a vector r consisting of three annual interest rates. We have avector e where e₁ is the date of partial retirement and e₂ is the dateof final retirement. We have a Boolean value f which is true if ourcurrency units are dollars and false if they are constant dollars ofepoch t=0.

-   -   Is_goal( ): Return true if goal and false if debt.    -   Adjusted( ): Returns true if it is a goal subject to inflation        adjustment, else returns false.    -   Cash_flow(t,e,φ,f): Return the data        {(n,C₁(n,t,φ,e),C₂(n,t,φ,e),C₃(n,t,φ,e))} for all the months t+n        where there is non-zero spending and with spending given in the        currency units specified by f.    -   Present_value(r,t,e,φ,f): Return

$V_{i} = {\sum\limits_{n}\frac{C_{i}\left( {n,t,\phi,e} \right)}{\left( {1 + r_{i}} \right)^{n/12}}}$

-   -   Dollar_duration(r,t,e,φ,f): Return

$D_{i} = {\frac{1}{12}{\sum\limits_{n}\frac{{nC}_{i}\left( {n,t,\phi,e} \right)}{\left( {1 + r_{i}} \right)^{{({n + 12})}/12}}}}$

-   -   Value_basis_point(r,t,e,φ,f): Return D_(i)/10,000.    -   Macauly_duration(r,t,φ,f): Return M_(i)=D_(i)/V_(i) for D_(i)        the dollar duration and V_(i) the present value.    -   Modified_duration(r,t,e,φ,f): Returns M_(i)/(1+r_(i)) for M_(i)        the Macauly duration.    -   Convexity(r,t,φ,f): Return

$\frac{1}{144}\frac{1}{V_{i}}{\sum\limits_{n}\frac{{n\left( {n + 12} \right)}{C_{i}\left( {n,t,\phi,e} \right)}}{\left( {1 + r_{i}} \right)^{{({n + 24})}/12}}}$

-   -   Percentage_convexity(r,t,φ,f): Return the convexity divided by        100.    -   Statistics(t,φ,e): Returns the present value, dollar duration,        Macauly duration, modified duration, convexity, percentage        convexity and value of a basis point for both dollars and        constant dollars together with the adjusted flag.    -   Face_value(t,φ): For a debt returns the principal amount of the        debt at time t along φ. For a goal returns 0.    -   Initial_ value( ): Returns the face_value at time t=0.    -   Cost(t,φ): Returns a balance sheet detail on the cost of the        claim. For a debt the presentation is

Face Amount F Interest Cost V − F Total Cost V

-   -   where F is the face amount and V the present value. For a goal        the presentation is

Base Cost V₁ Target Increment V₂ − V₁ Target Cost V₂ Additional V₃ − V₂Increment Total Cost V₃

-   -   where the V_(i) are the three present values in dollar units.    -   Spend(t,φ,e): Returns C_(i)(0,t,φ,e) in dollar units.    -   Apply(x,t,φ): Performs actions consequent on spending amount x        at time t on the claim. Typically, this results in debiting the        master bank account for amount x and returning book keeping        items recording one or more categories of spending. Some claims,        however, take different or additional actions.    -   Reschedule_cost(schedule): Only applies for debts. It is called        with a proposed rescheduling of principal payments and it        returns the full cost of the rescheduled debt. A schedule is a        list of tuples of the form (date, minimum, target, maximum).        Here, date is an absolute date and minimum; target and maximum        are the percentage of current principal balance to be repaid by        date. In general, we calculate the rescheduled cost by first        calculating the cost of immediately repaying the existing loan        (principal plus repayment penalty if any) and then calculating        the cost of a new loan in that amount which conforms to the        provided schedule.    -   Reschedule(schedule): Only applies for debts. It is called with        a rescheduling of principal payments and it replaces the        existing debt with the rescheduled debt.

The basic cycle for each period t is that for each claim j we callspend(t,φ,e) based on the current estimates of the retirement times e toget the three levels of spending s_(j,i). We define the aggregatespending S_(i) by

$S_{i} = {\sum\limits_{j}s_{j,i}}$Let A₁=S₁, A₂=S₂−S₁, A₃=S₃−S₂. The consumption policy will havedetermined an actual level of spending L. We define three allocationratios ρ_(i) by

$\rho_{1} = \left\{ {{\begin{matrix}1 & {{{if}\mspace{14mu} L} > S_{1}} \\{L/A_{1}} & {otherwise}\end{matrix}\rho_{2}} = \left\{ {{\begin{matrix}0 & {{{if}\mspace{14mu} L} < S_{1}} \\1 & {{{if}\mspace{14mu} L} \geq S_{2}} \\{\left( {L - S_{1}} \right)/A_{2}} & {otherwise}\end{matrix}\rho_{3}} = \left\{ \begin{matrix}0 & {{{if}\mspace{14mu} L} < S_{3}} \\1 & {{{if}\mspace{14mu} L} \geq S_{3}} \\{\left( {L - S_{2}} \right)/A_{3}} & {otherwise}\end{matrix} \right.} \right.} \right.$The actual spend x_(j) in the period on goal j is thenx _(j)=ρ_(i) s _(j,1)+ρ₂ [s _(j,2) −s _(j,1)]+ρ₃ [s _(j,3) −s _(j,2)]and for each claim j we call apply( ) with the spend x_(j). On aquarterly basis we call statistics( ) on each claim and accumulate theresults to generate eventual output.Debts

Several types of debts are among the claims.

Mortgages

Mortgages are basically bonds, but their contractual terms can beunusually complex. The simplest type of mortgage is the conventionalmortgage which consists of a number of equal monthly payments, typicallymade for anywhere between 10 and 30 years. It is considered that eachpayment consists partially of an interest payment and partially of aprincipal payment. The interest is calculated at a fixed rate on theoutstanding principal balance at the start of the month. The principalpayments gradually reduce that balance through time. In consequence astime goes by, the interest component of the monthly payment drops andthe principal payment rises. In other words, principal is repaid at anaccelerating rate over the life of the loan. In general only theinterest portion of the payment is deductible to the payer and taxableincome to the investor. Thus, the tax character of the income streamalso drops through time. Other mortgage structures are the interest onlymortgage, the installment mortgage, the negative amortizing and reversemortgage.

With the interest only mortgage (also known as a balloon mortgage), themonthly payments are all considered interest and the principal is repaidwith the final payment. Thus the structure is the same as an ordinary(i.e. bullet) bond. With an installment mortgage (rarely used), a levelfraction of the principal is repaid in each period together withinterest on the outstanding balance. In consequence, each payment issmaller than the previous payment.

With a negative amortizing mortgage, an interest rate is fixedinitially, but for some period of time, the periodic payments are lessthan the interest due. The unpaid interest is added to the principalbalance. Then at a certain date the monthly payment is adjusted so thatat least the interest is being fully paid (i.e. negative amortizationends.) At this point, the loan is equivalent to an interest onlymortgage. At a possibly latter date, the periodic payment increasesagain, with the result that principal is now being paid down and so theloan is, now equivalent to a conventional mortgage.

An extreme form of the negative amortizing structure is the reversemortgage. In this structure, there is a periodic monthly payment to thedebtor and this payment plus accrued but unpaid interest is added to theprincipal. This continues until the principal reaches a certain value atwhich point the loan either comes due or switches to a service mode(either interest only or amortizing). The interest on a mortgage caneither be fixed or floating. If the rate is floating it usually hasfloors and caps.

Mortgages typically contain options under which the debtor may choose toaccelerate payment of principal, either in whole or part. Accelerationof principal payment may result in a fee being levied on the debtor.

Often a mortgage comes due if the underlying property is sold. With anassumable mortgage the property purchaser has the option to assume themortgage payments.

If the debtor defaults on a mortgage, then the lender assumes ownershipof the property. Typically the lender sells the property as fast aspossible so as to curtail the costs of ownership (e.g. taxes, insurance,maintenance). Because of hurried sale, the mortgage forecloser typicallyis not able to realize the full value of the property.

The same property may have several mortgages on it—described as first,second, third mortgages, etc. Mortgages other than a first mortgage aresometimes termed home equity loans. If a default occurs, the firstmortgage holder can take possession and sell off the property, withwhatever residue is generated being distributed to the second and thirdmortgage claimants. Since the first mortgage holder has no incentive tosell for a higher price than his own claim and since he has an incentiveto sell quickly and thus cheaply, the likelihood of there being asubstantial residue is remote. Thus when a default occurs, an equitylender is faced with the choice of either writing off the loan as a baddebt or else purchasing the property from the first mortgage holder forthe value of the first mortgage and then trying to turn a net profit byselling the property for more than the amount of the first mortgage.

In general, property owners keep up loan payments as long as there isnet value in the property and so defaults usually occur when propertyvalues are close to the principal balance on the outstanding debts.Mortgage structures (if they provide for amortization) will typicallyreduce principal balances over time and property values typically riseover time due to general inflation. Thus, with conventional financialstructures, the possibility of default typically declines over time.Thus although mortgages may have long lives, the credit risk inherent inthe mortgage is typically concentrated in the first few years. Withnegative amortizing structures, however, this pattern does notnecessarily apply.

Generally, non-conventional mortgage structures can embed high andcomplex risks in terms of both credit and interest rate risk. Typicallysuch loans are only extended by professional lenders (i.e. banks) andmost private mortgages are of the conventional type.

Finally, it should be emphasized that mortgages contain complex interestrate risks. Basically if rates fall, the debtor will refinance whichresults in principal being received when opportunities for reinvestmentare poor. If rates rise, the debtor will typically not repay the loanunless forced to by the mortgage both being non-assumable and theborrower deciding to sell the property (e.g. because the borrower's jobhas moved.) However, if rates rise, the value of the loan on a presentvalue basis will fall below par. In short, changes in interest ratesgenerally represent reduction in value to the mortgage investor, nomatter which direction rates move in. Mortgage investors prefer highstable interest rates. Mortgage borrowers, by contrast, prefer ratesthat trend steadily downwards.

Basically, mortgages are described by giving the contractual terms thatdetermine cash flows and the current principal balance. To allow forcomplex mortgages whose payment structures evolve through time, termsare given as a list of terms that apply over subperiods of loan life.Simple mortgages may have only a single element on the list.

Input for calculations may include:

Label Type Contents description text identifying label date date balancedate amount float principal balance on date assumable check true ifassumable mortgage pre-pay premium float fee for full pre- payment as afraction of outstanding balance default risk check true if fullperformance on the loan is unlikely salvage value integer estimatedvalue in the event of a default list: structure choice type of paymentstructure in period list: trigger choice what triggers start of periodlist: start date date date period starts if trigger is date list: startamount float amount at which period starts if trigger is principalbalance list: period integer number payments per year list: amount floatperiodic payment or principal installment if installment list: ratechoice how interest rate determined list: fixed_rate float annualinterest rate if fixed rate list: base list base rate off which ratefloats list: spread int spread added to base rate list: has_cap checktrue if there is a cap on the interest rate list: cap float maximuminterest rate list: has_floor check true if there is a floor on theinterest rate list: floor float minimum interest rateStructure is conventional, interest only, balloon, maturity,installment, negative amortizing and reverse. Trigger is date or amount.Rate is fixed or floating. Base is a list of base rates (e.g. COFI.)Default risk and salvage value only apply to mortgages owned. Prepaypenalty and assumable only pertains to mortgages owed.

On the creditor's lifetime resources and claims statement, we show theloan as

-   -   principal amount    -   (interest adjustment)    -   (credit adjustment)    -   net amount        On the debtor's lifetime resources and claims statement, we omit        the credit adjustment. The principal amount is the current        principal balance on the loan. Compare the principal amount to        the loan's present value (see the simulator section for the        calculation.) If the present value is greater than the principal        amount, the interest adjustment is zero for the creditor. If the        present value is less than the principal amount, then the        creditor's interest adjustment is equal to the principal amount        less the present value. For the debtor, calculate the        refinancing amount by applying the refinancing fee to the        current principal balance and calculate the adjusted principal        balance as the principal balance plus the refinancing amount. If        the adjusted present value of the mortgage is greater than the        adjusted principal balance then the interest adjustment is equal        to the refinancing amount. If the adjusted present value is        between the principal balance and adjusted principal balance        then the interest adjustment is the adjusted present value less        the principal balance. If the adjusted present value is less        than the principal amount then the interest adjustment is the        principal amount minus the adjusted present value. For the        creditor we calculate the credit adjustment as follows. If        default is considered likely, take the salvage value to be the        recovery. Otherwise, add the total of prior indebtedness (if        any) to the current principal balance to get total debt. If        total debt is less than 90% of current market value then credit        adjustment is zero. Otherwise the likely recovery is 85% of        market value minus prior indebtedness. If the recovery is less        than zero set it equal to zero. Let X be the sum of the        principal amount and interest adjustment. If the recovery is        greater than or equal to X then the credit adjustment is zero.        Otherwise the credit adjustment is X minus the recovery.

In simulation, one determines the condition applying to a time period asfollows. If the trigger is start then a set of conditions starts on thatdate. It the trigger is amount then the conditions start when theprincipal balance reaches the trigger amount. Conditions continue untilthe next condition applies or the principal balance is reduced to zero.One determines the annual interest rate as follows. If the rate is fixedthen it is given by fixed_rate. If it is floating we find the value ofthe base rate for the period and add to it the spread. We then comparethat to the cap (if present) and reduce it to the cap if above.Similarly we compare it to the floor, if present, and raise it to thatlevel if below. However, determined, the annual rate is divided by thenumber of periods per year to arrive at the period rate.

We determine the cash flow during a period as follows. For aconventional mortgage, the periodic payment is given by amount. For aninterest only mortgage, the payment is determined by applying the periodrate to the outstanding principal amount at the start of the period. Aballoon results in a single payment in the given amount. A maturityresults in a single payment equal to the principal balance. Aninstallment results in a payment which is the sum of amount plus theinterest rate times the initial principal balance. For a negativeamortizing mortgage the cash flow is the amount. For a reverse mortgagethe debtor receives cash equal to the amount.

One determines tax flow and updated principal balance as follows. For aconventional mortgage apply the interest rate to the principal balance,the result is the interest paid. Subtract interest paid from cash flowto get principal paid. Subtract principal paid from principal balance toget the new principal balance. For interest only, the cash flow is allinterest paid and the principal balance is unchanged. For balloon andmaturity, the payment is all principal and principal balance is reducedby the amount of the payment. For installment, the amount is principaland it is applied to reducing the principal balance and the rest of thepayment is interest. For negative amortizing calculate the interest dueby applying the interest rate to the principal balance. Interest paid isequal to interest due. Subtract the amount paid from interest due to getunserviced interest. Unserviced interest is added to principal balance.For reverse calculate interest due as before. Then, interest paid equalsinterest due. Add interest due to the cash amount received to get theperiod advance. Add the period advance to the principal balance to getthe new principal balance.

To calculate the current present value of the loan, assume currentinterest rates remain constant and project cash flows over the remainderof the loan's life. Then discount those cash flows using the interestrates from the conventional mortgage yield curve. If the mortgage isassumable, the adjusted present value equals the present value. If themortgage is not assumable and the property owner's plans call forselling the property before the loan is fully repaid, then project cashflows through to the estimated sale date and interpolate a maturitypayment at the sales date. Then discount the cash flows as before to getthe adjusted present value.

When a loan is rescheduled, assume the rescheduled loan is aconventional mortgage whatever the type of the initial mortgage was.

Debt types other than mortgage include margin loans, life policy loans,installment debt, credit cards and educational loans, among others.

Investment Strategies

Returning again to FIG. 4, the user has a choice to create a custominvestment strategy and policy 405, regardless of the outcome of goalbalancing. If customization is selected, an investment strategy andpolicy are set. The user also has the choice of creating scenarios 407for difficulties that might be encountered. Scenarios that may bedirectly offered by the system include one of the principals dying on agiven date, the principals dying in a certain order, a specific datewhen a whole class of assets experience a particular economic impact orwhen a particular asset experiences the impact, a date on which a mergerforces liquidation of a certain asset or results in extinction of aconversion right, or a period of abnormal capital market behavior.Behavior countering a scenario may be specified, either directlyresponsive to the scenario or after a specified learning period.

Simulation of the portfolio 408 preferably includes simulation oftrading costs, tax consequences, management fees and particulars ofassets. The portfolio holdings and associated costs may be driven by astyle of investment, distribution of investments among sectors andoverlapping among sectors held in mutual funds or other diversifiedinvestments. An initial simulation is likely to result in revisions toasset holdings over time. Current investments may be the subject ofrecommendations regarding cash distribution, mix of investments, assetbalancing and the like. Analysis of current investments may beconstrained to defined investment opportunities, such as funds managedby the analyst's employer. Future asset and investment allocation overtime is likely change at least once in a thirty year span, for instance,as the principals' risk tolerance and desired margin of safety change.The consequences of taxes, fees and management should be taken intoaccount, for the simulation to meaningfully project future outcomes.Useful metrics of the simulation results include comparing a currentinvestment strategy to a recommended asset mix. Metrics include cashflow analysis over time and goal achievement under a variety ofconditions, from unfavorable to favorable or unfortunate to fortunate.Optionally, to avoid fixation on the upside of a portfolio, goalachievement may be described for an average case, unfavorable case andan unfortunate case, without describing the better than average,favorable cases. Other metrics include trajectory analysis, risk budgetanalysis, margin of safety analysis and a lifetime resources and claimsstatement. These metrics can be included in one or a series of clientreport(s) 409, as the analysis is refined.

An investment strategy may be tested or illustrated by simulation. Arisk budget may be recommended, combining stated risk taking propensitywith a rigorous analysis of value at risk, safety margin or a similarmeasure. Generic and personal investment opportunities and investmenthorizon analysis can be generated from the simulation statistics. Amargin of safety graph can be presented. Similarly, cash flowrequirements, lifetime resources and claims statement analysis andsimulated IRS tax form 1040 reports can be produced from the simulationresults. These additional elements can be included in the clientreporting 409.

Retirement Timing and Income Goals

Retirement Goals Overview

FIG. 6 depicts one flow of collecting retirement goal information. Theleft hand diagram illustrates the overall flow. The right hand dateentry diagram 620 depicts logic that is repeated for partial retirement604 and full retirement 605 dates. Because a household may include morethan one principal, the flow begins with selecting a principal 601. Thenext selection is to enter retirement timing parameters 602. Optionally,this could be done after entering income goals 607. The systemdetermines whether the user intends a period of partial retirement 603.If so, dates for partial retirement are entered 604. Dates for fullretirement are entered 605. This completes entry of timing data 606. Thedetail of entering dates for partial or full retirement 604, 605 are inthe dates entry flow 620. The system determines whether a range of dateswill be entered 621 and, if not, whether retirement is desired as soonas possible 622. The system accepts data entry for retirement as soon aspossible 624, at a particular age 625 or during a range of ages 623. Theflow continues 626 with the dates for partial or full retiremententered. Upon selection of income goal entry 607, the relevant period isidentified 608, among full employment, partial retirement or fullretirement. Optionally, partial retirement of one or two wage earnerscould be distinguished. A floor amount of income during the retirementperiod is entered 609. If more periods remain to be entered 610, theprocess is repeated. When entry for all relevant periods is complete,the entry of income goals is done 611.

FIGS. 7A-7B depict one interface that implements steps in the FIG. 6flow. FIG. 7A corresponds to date entry 620. In this embodiment, radiobuttons are used to implement the retirement timing choices 621, 622.Selection of a radio button enables corresponding date entry fields. Inthe left hand column of FIG. 7B, a sequence of steps used by this wizardis given, which collectively enable entry of retirement data for a twoprincipal/wage earner household. In the right hand column, alternativeamounts of disposable income for a retirement period can be entered:minimum, target and maximum amounts are supported by this embodiment.

FIG. 8 depicts the relationship between a retirement timing goal 801 anda plurality of income goals and retirement timings 802, 803. Householdsare defined in this embodiment as having one retirement timing goal thataggregates several other goals. The household retirement timing goal isassociated 811 with income goals 802 for periods of full employment,partial retirement and full retirement. The retirement timing goal isalso associated 812 with retirement timing goals 803 for each of thehousehold principals or wage earners.

Retirement Timing

The conceptual framework is that a person has a period of fullemployment, then a period of partial employment and finally a period offull retirement. In certain instances, of course, one or more of theseperiods may be collapsed into non-existence (for instance for alreadyretired persons.) Thus the dates of partial and full retirement fixthese periods. A couple may involve two employed persons each withretirement dates. For the couple partial retirement commences on theearliest full or partial retirement of a member of the couple.Similarly, for the couple full retirement commences when both membersare fully retired. Dates given relative to the full/partial retirementevents should use the couple's full/partial retirement dates. For bothpartial and full retirements one may specify a target date and a rangewithin which the date may fall. We treat the latest date as representinga mandatory retirement point. Thus there is no cost associated withretirement at the latest possible date. Bringing the retirement dateforward from there incurs cost equal to the salary income foregone byearly retirement.

Input for calculations may include:

Label Type Contents person choice person who retirespartial_not_applicable check true if no partial retirement periodincome_fraction Float salary during partial retirement as percentage ofsalary in full employment partial_start choice as soon as possible, orat age partial_age integer target age at which partial retirement startspartial_before integer earliest age for partial retirement partial_afterinteger oldest age for partial retirement full_not_applicable check trueif no full retirement period full_start choice as soon as possible, orat age full_age integer target age at which full retirement startsfull_before integer earliest age for partial retirement full_afterinteger oldest age for partial retirementOne should have partial_before≦partial_age≦partial_after,full_before≦full_age≦full_after, and partial_before≦full_before,partial_age≦full_age, partial_after≦full_after,

-   -   Adjusted: True if the annual salary is inflation adjusted    -   Cost: Let p₁, p₂, p₃ denote the dates of partial retirement        (earliest, target and latest respectively. Similarly let q₁, q₂,        q₃ denote the dates of final retirement. We are given actual        partial and final retirement dates e₁ and e₂ Let f be the income        fraction. Let S(n,t,φ) be the salary at time t+n if fully        employed. Then in dollars

${C\left( {n,t,\phi,e} \right)} = \left\{ \begin{matrix}0 & {{{{if}\mspace{14mu} n} + t} < e_{1}} \\{\left( {1 - f} \right){S\left( {n,t,\phi} \right)}} & {{{if}\mspace{14mu} e_{1}} \leq {n + t} < e_{2}} \\{S\left( {n,t,\phi} \right)} & {{{if}\mspace{14mu} e_{2}} \leq {n + t} < q_{3}} \\0 & {{{if}\mspace{14mu} q_{3}} \leq {n + t}}\end{matrix} \right.$

-   -   Spend: Return C_(i)(0,t,φ,e).    -   Apply: Called when retirement policy decides retirement should        occur. Updates human capital accordingly. May adjust insured        amount for term life.

Income Goals

Income goals are goals for personal spending during different periods oflife. The periods are those of full employment, partial retirement andfull retirement. From the point of view of user input we provide both ashort form and a long form of input.

Input for calculations may include:

Label Type Contents period choice life period minimum integer minimumincome requirement target integer target income requirement maximuminteger maximum income requirementAn implicit input is the cola sensitivity κ with a value of 1.

Input for calculations may include:

Label Type Contents period choice life period as_prior check if true setall values equal to prior life period schedule: category Text statictext label for major spending category schedule: item Text static textlabel for minor spending category schedule: as_prior check if true setitem value equal to prior life period schedule: amount integer targetspending level for amount schedule: fixed check if true amount mustequal target schedule: minimum integer minimum spending level for amountschedule: maximum integer maximum spending level for amountFor each item minimum≦amount≦maximum. If fixed is true, then internallytreat minimum and maximum as equal to amount (but display is blank). Ifas prior is checked for an item, then internally carry forward thevalues of amount, fixed, minimum and maximum from the prior period, butdisplay as blank. If as prior is checked for the whole period then treatas if checked for each item. The initial list of categories and itemsis:

-   -   Rental Expense: Rent, maintenance fee, renter's insurance.    -   Household Expenses: Groceries and supplies, restaurant meals,        garden supplies, computer equipment/supplies, appliances.    -   Household Services: Gardner, domestic, household employee taxes,        water, gas, electricity, trash, security, pool, telephone,        television, internet, plumbing/repair services, personal        property insurance.    -   Transportation Expenses: Gasoline, service, parking, tolls,        taxes and fees, fines, public transit.    -   Personal Expenses: Toiletries/cosmetics, nonprescription drugs,        clothing    -   Personal Services: Dry cleaning/laundry, barber/salon/spa,        legal/accounting, banking/investment.    -   Health Care Expenses: Insurance, doctor, dentist,        vision/hearing, prescription drugs, therapies.    -   Recreational Expenses: Entertaining, Vacation/travel,        reading/music/movies, gym/clubs, gifts, contributions, hobbies,        tickets.    -   Professional Expenses: Uniform/clothing, Dues, Publications,        Education, disability insurance, home office expenses.    -   Children Expenses: Day care/school tuition, school supplies,        lunch money, allowances, clothing, barber, gifts,        activities/lessons, medical, dental/orthodontia, prescriptions,        vision/hearing, vacation/camp.    -   Capital expenses: automobile, other motor vehicles,        rug/furniture, household appliances, house/garden/pool systems.    -   Miscellaneous Expenses: Other.

The list of categories and items can be expected to evolve. Sum over allitems to get target, minimum and maximum expense levels. Let v_(i) bethe amount for item i. The cola sensitivity is

$\kappa = \frac{\sum\limits_{i}{v_{i}\sigma_{i}}}{\sum\limits_{i}v_{i}}$where σ_(i) is the sensitivity coefficient for item i.

-   -   Adjusted: Returns true.    -   Cost: Let I(t,φ) denote the CPI index at time t along path φ and        let μ denote the expected inflation rate. Let κ be the cola        sensitivity. Let the adjusted mean be μ′=κμ and the adjusted        index be I′(t,φ)=(1+κr)^(t) where        r=e ^(ln [I(t,φ)]/t)−1    -   Let Q_(i)(k) denote the minimum, target and maximum amounts        divided by 12 (to adjust to monthly from annual) for period k.        Let

${\psi\left( {s,e} \right)} = \left\{ \begin{matrix}1 & {{{if}\mspace{14mu} s} < e_{1}} \\2 & {{{if}\mspace{14mu} e_{1}} \leq s < e_{2}} \\3 & {otherwise}\end{matrix} \right.$

-   -   for e₁ and e₂ the dates of partial and full retirement. Then        C_(i)(n,t,φ,e) is the result of inflation adjusting        Q_(i)(ψ(t+n,e)) using the adjusted index and mean.    -   Spend: Return C_(i)(0,t,φ,e).    -   Apply: Debit cash for spend and return a cash flow of form        INCOME_DISTRIBUTION.        Special Expenditures

Education

Education goals reflect payment of educational expenses for oneself orothers, as discussed in the context of FIG. 5. Typical examples includesending children or grandchildren to secondary school or college.

Input for calculations may include:

Label Type Contents Description text identifying label Donor choicehousehold or individual Name list name of household member if donor isindividual Funding choice how funded Degree choice degree soughtInstitution choice type of institution Years integer planned length ofprogram Starting date year and month program starts Tuition integerestimated annual cost for tuition, books, etc. Board integer estimatedannual boarding expense minimum float minimum percentage funded Targetfloat target percentage funded maximum float target percentage fundedChoices for funding are all, personal, personal plus joint. Choices fordegree are high school diploma, 2 year college certificate, businesscollege degree, 4 year college (BA/BS), graduate (MA/PhD), professional(MBA/MD/LLD). Choices for institution are public, parochial, private,selective private, for profit.

-   -   Adjusted: Returns true.    -   Cost: Based on the degree and institution determine the        appropriate inflation index to use for adjusting the tuition        amount. Use the CPI inflation rate to adjust board. Denote the        adjusted tuition and board by T(n,t,φ) and B(n,t,φ) respectively        and set the monthly spending S(n,t,φ)=[T(n,t,φ)+B(n,t,φ)]/12.        Let x_(i) denote the minimum, target and maximum ratios.        Determine the finish date of the program by adding years to        start. Let χ(m) be 1 if time m is between the start and finish        dates and 0 otherwise. Then C_(i)(n,t,φ)=x_(i)χ(t+n)S(n,t,φ)    -   Spend: Returns C_(i)(0,t,φ).    -   Apply: Debit cash and generate cash flow item of type        EDUCATION_EXPENSE.

Family Support

This goal is the counterpart of the family support resource. Itrepresents periodic payments to an individual (typically a familymember) or to a family unit. Typical examples would include support forelderly parents, for a divorced daughter and her child or for anorphaned grandchild or niece/nephew. Issues are:

-   -   Does the payment generate a gift tax liability for the        benefactor or is it excludable from tax?    -   Does the payment terminate on the benefactor's death and if so,        is the benefactor the household (if a couple) or just a single        member of the household?    -   Does the payment terminate on a fixed date, on the beneficiary's        death or on the earlier or latter of the two events?        It should be noted that there is no assumption in the goal that        the beneficiary is actually related to the donor. Thus, this        goal might for instance be used to represent payment of a        pension to a retired domestic.

Input for calculations may include:

Label Type Contents Description text identifying label Donor choicehousehold or individual Name List name of household member if donor isindividual Funding Choice how funded Minimum integer minimum annualpayment Target integer target annual payment Maximum integer maximumannual payment cola check true if subjected to cost of living adjustmentgift tax excludable check true if not subject to gift tax start datedate payments start end choice event ending the payments end_date datedate payments end if end is date schedule: beneficiary text beneficiaryname schedule: born integer year of birth schedule: sex choicebeneficiary's sex terminated check true if payments terminate onbenefactors death benefactor choice benefactor is household orindividual (if terminated true) name choice name of benefactor ifbenefactor is an individual (if terminated true and benefactor isindividual)Choices for end are date and beneficiary death. The schedule holdsparticulars on the beneficiaries (not needed if end is date). Choicesfor benefactor are household or individual (not needed if terminated isfalse).

-   -   Adjusted: True if subject to cola.    -   Cost: Let φ(m) denote the probability that the beneficiary is        alive at time m. If the support is terminated by a date let

${\chi(m)} = \left\{ \begin{matrix}1 & {{if}\mspace{14mu} m\mspace{14mu}{is}\mspace{14mu}{between}\mspace{14mu}{the}\mspace{14mu}{start}\mspace{14mu}{and}\mspace{14mu}{end}\mspace{14mu}{dates}} \\0 & {otherwise}\end{matrix} \right.$

-   -   If the support is terminated by the beneficiaries death let

${\chi(m)} = \left\{ \begin{matrix}{\phi(m)} & {{if}\mspace{14mu} m\mspace{14mu}{is}\mspace{14mu}{on}\mspace{14mu}{or}\mspace{14mu}{after}\mspace{14mu}{the}\mspace{14mu}{start}\mspace{14mu}{date}} \\0 & {otherwise}\end{matrix} \right.$

-   -   If the support is terminated by the earlier of the end date and        the beneficiary's death then let

${\chi(m)} = \left\{ \begin{matrix}{\phi(m)} & {{if}\mspace{14mu} m\mspace{14mu}{is}\mspace{14mu}{between}\mspace{14mu}{the}\mspace{14mu}{start}\mspace{14mu}{and}\mspace{14mu}{end}\mspace{14mu}{dates}} \\0 & {otherwise}\end{matrix} \right.$

-   -   If the support is terminated by the latter of the end date and        the beneficiary's death then let

${\chi(m)} = \left\{ \begin{matrix}1 & {{if}\mspace{14mu} m\mspace{14mu}{is}\mspace{14mu}{between}\mspace{14mu}{the}\mspace{14mu}{start}\mspace{14mu}{and}\mspace{14mu}{end}\mspace{14mu}{dates}} \\{\phi(m)} & {{if}\mspace{14mu} m\mspace{14mu}{is}\mspace{14mu}{after}\mspace{14mu}{the}\mspace{14mu}{end}\mspace{14mu}{date}} \\0 & {otherwise}\end{matrix} \right.$

-   -   Let A_(i) denote the minimum, target and maximum amounts divided        by 12. If the amounts are subject to cola then let Q_(i)(n,t,φ)        denote A_(i) after adjustment by the CPI. Otherwise let        Q_(i)(n,t,φ)=A_(i). If the payment's are terminated by the        benefactor's death let ψ(s) be the probability the benefactor is        alive at time s otherwise let psi(s)=1. Then        C_(i)(n,t,φ)=χ(n+t)ψ(n+t)Q_(i)(n,t,φ).    -   Spend: Returns C_(i)(0,t,φ).    -   Apply: Debit cash. Return a cash flow item of type        FAMILY_SUPPORT or TAXABLE_GIFT depending as excludable or not.

Charitable Giving

This goal consists of one-time or annual contributions to organizations.Some organizations may be considered charities in which case thecontribution is tax deductible. The goal is formulated as a total spendrather than on a per beneficiary basis. By default, spending is assumedto terminate on the death of the donor, who may be either the householdor a member of the household, but can be specified to continue until adate.

Input for calculations may include:

Label Type Contents Description text identifying label Donor choicehousehold or individual Name choice name of household member if donor isindividual Funding choice how goal is funded start choice absolute orevent time frequency choice one-time or annual terminates choiceabsolute or event time, if frequency annual terminus date whenterminates if frequency annual survives check true if spending survivesdonor's death amount choice dollar or per cent after tax income Minimuminteger minimum spend Target integer target spend Maximum integermaximum spend deductible integer tax deductible fraction

-   -   Cost: Let t denote a time variable. If amount is dollar let        A_(i)(t) denote the minimum, target and maximum values        respectively for i=1, 2, 3. If amount is percent let π_(i)        denote the three percentages; let I_(i)(n,t,φ) be the minimum,        target and maximum income for time t+n and set        A_(i)(n,t,φ)=π_(i)I_(i)(n,t,φ)/12. Define χ(t) to be 1 between        start and terminus and 0 otherwise. Let ψ(s) denote the        probability that the donor is alive at time s if giving is        terminated by the donor's death and let ψ(s)=1 otherwise. Let        C_(i)(n,t,φ)=χ(t+n)ψ(t+n)A_(i)(n,t,φ).    -   Adjusted: False if amount is dollar, else true.    -   Spend: Returns C_(i)(0,t,φ)    -   Apply: Debit cash. Calculate the deductible fraction and return        a cash flow item of type CHARITABLE_DEDUCTION. Return an item of        type CONTRIBUTION for the remaining balance.        Capital Expenditures

Real Property Purchase

The goal of purchasing real property shares considerable descriptivedata with the real property resource, but may be less detailed,reflecting the generally greater vagueness about a planned acquisitionthan an actual holding. One aspect of a real estate purchase is how itwill be financed. We assume the following financing structure: Proceedsfrom sale of an identified existing property are applied; additionalcash may be invested at time of purchase (a down payment); a mortgage istaken for a term of years; if the mortgage is not fully amortizing theremaining balance is paid at maturity (final payment); and the propertymay generate annual rents and tax deductions.

Several examples will indicate typical possibilities. A starter home maybe purchased with a small down payment and a long fully amortizingmortgage. An expansion home is purchased with the proceeds from the saleof the starter home, a cash down payment and a partially amortizingmortgage whose final payment coincides with a planned lump sum payoutfrom a retirement plan. A rental property is purchased with a downpayment and a mortgage where the rents and tax benefits offset themortgage service cost. In general, the costs of ownership include boththe purchase price and the annual upkeep (taxes, maintenance andinsurance.)

Input for calculations may include:

Label Type Contents Description text identifying label Funding choicehow funded Type choice type of property Neighborhood choice type ofneighborhood in which located Location choice geographical region inwhich located Minimum integer minimum purchase price Target integertarget purchase price Maximum integer maximum purchase price tax floatannual property tax rate maintenance float annual maintenance cost asper cent of purchase price insurance float annual insurance cost as percent of purchase price timing choice event time or absolute timeEarliest date earliest purchase date Planned date planned purchase dateLatest date latest purchase date preference check true if preference isfor sooner rather than latter schedule: property choice propertyresource whose sale proceeds are applied to purchase schedule:percentage integer percentage of net sales proceeds applied cash choiceunits are dollars or per cent of purchase price Minimum cash integerminimum cash down payment Target cash integer target cash down paymentMaximum cash integer maximum cash down payment mortgage fraction integerfraction original balance amortized over term term integer yearsoriginal life in mortgage rent choice dollar or per cent of purchasecash rent integer annual cash rent depreciation integer annualdepreciation claimed on tax form

-   -   Cost: Let t be the time at which we are evaluating cost. If        earliest or planned are before t then advance them to t. We        calculate three cases. The target case is for the target value        at the planned time. If preference is for sooner the minimum        case is for the minimum amount at the latest time and the        maximum case is the maximum at the earliest time. If preference        is for latter then the minimum case is for the minimum amount at        the earliest time and maximum case is for the maximum value at        the latter time. Consider one case. Let the purchase time be        t+n. Use type, neighborhood, and location to determine an        inflation index. Inflation adjusts the purchase price to the        purchase date; call the result P. For each property i in the        schedule, let N_(i) be the net proceeds from sale at the        purchase time t+n for the case. Let f_(i) be the associated        percentage and let

$N = {\sum\limits_{i}{f_{i}N_{i}}}$

-   -   be the total net proceeds. Let N′=min(P,N). Let B=P−N′ be the        balance. If B=0 let D=0. Otherwise let c be the minimum, target        or maximum cash depending as this is the maximum, target or        minimum case. If cash is percent let d=cP otherwise d=c. Set        D=min(d,B). Let M=B−D. Then D is the cash down payment and M is        the mortgage amount. The final amount is F=(1−a)M for a the        amortization fraction. The cash flows are    -   N′+D at time t+n    -   as determined by the mortgage terms through maturity    -   F at maturity    -   Spend: Returns C_(i)(0,t,φ).    -   Apply: Called when purchase occurs. Sell the scheduled        properties and repay attached mortgages. If a mortgage is        assumable and has a negative interest cost adjustment then        reduce sales price by adjusted mortgage balance and remove the        mortgage from the portfolio. Debit cash for the amount of the        down payment. Create a new property holding. Set its fields        based on descriptive data provided. Attach a conventional        mortgage of the indicated term and amortization rate.

Lump Sum

A one-time spending goal without special features.

Input for calculations may include:

Label Type Contents Description text identifying label Donor choicehousehold or individual Name list name of household member if donor isindividual Funding choice how funded Minimum integer minimum annualpayment Target integer target annual payment Maximum integer maximumannual payment cola check true if subjected to cost of living adjustmentEarliest date Earliest date Planned date Planned date Latest date latestdate

-   -   Adjusted: True if cola applies.    -   Cost: Let the minimum case be the minimum value at the latest        time, the target case be the target value at the target time and        the maximum case be the maximum value at the earliest time. If        cola applies, CPI adjust the value to the time. The cash flow is        the (possibly adjusted) value at the time.    -   Spend: Return C_(i)(0,t,φ).    -   Apply: Called when expenditure occurs. Debit cash and return a        cash flow item of type CAPITAL_EXPENDITURE.        Estate Planning Goals

Personal Gifting

This goal represents the goal of giving money on an annual basis to agroup of individuals. Typically gifting programs are entered into as anestate planning tool and are calibrated to maximize the tax benefit.Currently tax law allows $11,000 a year to be given from one donor toone beneficiary tax free. Thus a typical gifting program would call fora couple to jointly give $22,000 a year to each child during the couplesjoint lives and then $11,000 a year during the survivor's life. Severalobvious variants on this on this scheme would include:

-   -   Giving less than the tax-free maximum or more.    -   Including spouses and grandchildren in the program so as to        maximize the tax free transfer.    -   Only one member of the household makes the gifts (perhaps        because the children come from a prior marriage).    -   Giving different amounts to different individuals, e.g. because        the goal is equal transfers on a family unit basis rather than a        per individual basis.    -   Does the gift flow terminate on a beneficiaries death (or does        it continue in favor of a representative of the deceased        beneficiary)?    -   Does the program terminate once the donor's net worth has been        reduced to some level (e.g. the lower limit for incurring an        estate tax.)?        It is support for these various features which distinguish the        personal gifting goal from the family support goal.

Input for calculations may include:

Label Type Contents Description Text identifying label Grantor choiceindividual or household Name choice name of individual if grantor isindividual Funding choice how funded Start choice event or absolute timestart time date when program starts until choice when program terminatesterminates date terminal time early termination check true if terminateson low net worth net worth integer net worth level at which programterminates amount choice dollar or per cent after tax income Minimuminteger minimum program spend Target integer target program spendMaximum integer maximum program spend tax limit check true if spendlimited to tax free amount maximize transfer check true if shares ofspend adjusted to maximize transfer schedule: name text beneficiary nameschedule: born integer year beneficiary born schedule: sex choice maleor female schedule: shares integer shares in total spend schedule:survivor check true if gift survives beneficiary's death

-   -   Adjusted: False if dollar else true.    -   Cost: Let t be a time variable. Define χ(t) to be 1 between        start and terminus and 0 otherwise. If amount is dollar let        A_(i)(t) denote the minimum, target and maximum values        respectively for i=1, 2, 3. If amount is percent let π_(i)        denote the three percentages; let I_(i)(n,t,φ) be the minimum,        target and maximum income for time t+n and set        A_(i)(n,t,φ)=π_(i)I_(i)(n,t,φ). If the amount is limited to the        tax free amount and shares can be increased, calculate the limit        as L=τ(t)n_(g)n_(b) where τ(t) is the limit per gift in year t,        n_(g) is the number of grantors and n_(b) is the number of        beneficiaries. Then reduce A_(i)(n,t,φ) to L should it be        greater. If shares cannot be increased, let S_(i) be the number        of shares for beneficiary i, S the total number of shares and x        the largest value of S_(i). Then L=τ(t)S/x and we may adjust        A_(i)(n,t,φ) as before. Let ψ(s) be the probability that the        grantor is alive at time s if death terminates giving and ψ(s)=1        otherwise. Let C_(i)(n,t,φ)=χ(t+n)ψ(t+n)A_(i)(n,t,φ)/12. Let        V_(i) be the present value of the gift stream. If early        termination applies, let R denote total resources, G_(i) the        value of other goals at the three levels, and K the minimum        wealth level to be maintained. Let N_(i)=max(0,R−G_(i)−K). If        V_(i)−N_(i) then reduce V_(i) to N_(i).    -   Adjusted: False if amount is dollar else true.    -   Spend: Returns C_(i)(0,t,φ).    -   Apply: Debit cash. Determine exempt fraction and return a cash        flow item of type EXEMPT_GIFT. Return a cash flow item of type        TAXABLE_GIFT for the balance.

Bequest Goal

This goal establishes a size for one's estate (before estate taxes).

Input for calculations may include:

Label Type Contents Description Text identifying label Testator choicehousehold or individual Name Choice name of household member if testatoris individual Funding Choice how funded Minimum integer minimum estateTarget integer target estate Maximum integer maximum estate cola checktrue if subject to cost-of- living adjustment

-   -   Adjusted: True if cola    -   Cost: Let b_(i) represent the minimum, target and maximum        bequest amounts for i=1, 2, 3. Let d(n,t) represent the        probability that death occurs at time t+n given survival to        time t. If cola applies let B_(i)(n,t,φ) be b_(i) after CPI        adjustment to time t+n. Otherwise let B_(i)(n,t,φ)=b_(i). Then        C_(i)(n,t,φ)=d(n,t)B_(i)(n,t,φ).    -   Adjusted: True if cola applies.    -   Spend: Returns 0.    -   Apply: Called on death. Debits cash and returns a cash flow item        of type BEQUEST.

Property Bequest Goal

This goal represents bequest of a particular property plus cash in someratio to the value of the property. For instance, the goal might be toleave a house to one child and cash of equal value to two otherchildren, so in this case the cash ratio would be 2.0. Here the minimum,target and maximum are taken as percentage realization of the goal.

Input for calculations may include:

Label Type Contents Description Text identifying label Testator choicehousehold or individual Name Choice name of household member if testatoris individual Property text property identifier debt_free Booleanbequest free of debt if true Cash float cash multiple of property valueMinimum integer minimum percentage Target integer target percentageMaximum integer maximum percentage

-   -   Adjusted: Return true.    -   Cost: Let P(t,φ) be the market value of the property at time t        along path φ, and let D(t,φ) be the value of mortgages on the        property at time t along path φ. Let κ be the cash multiplier.        If the goal is to leave the property debt free let Q (t,φ) be        D(t,φ)+κP(t,φ). Otherwise let Q(t,φ) be κ[P(t,φ)−D(t,φ)]. Let        π_(i) be the three percentages. Let d(n,t) be the probability of        death in year t+n and ρ the risk free rate. Then

${V_{i}\left( {t,\phi} \right)} = {\pi_{i}\left\lbrack {{P\left( {t,\phi} \right)} + {{Q\left( {t,\phi} \right)}{\sum\limits_{n}\frac{d\left( {n,t} \right)}{\left( {1 + \rho} \right)^{n}}}}} \right\rbrack}$

-   -   is the cost of the goal.    -   Spend: returns 0.    -   Apply: Called on death. If mortgage to be paid then pay it.        Remove property from household. Debit cash for any associated        cash bequest. Return cash flow item of type BEQUEST equal to        total value paid out.        Schema Architecture

FIGS. 9A-9B include selected excerpts from the object model schema (OMS)of a retirement goal. The OMS representation has been developed tofulfill needs not satisfied by traditional XML schema languages. Thefull OMS of a retirement goal appears in the accompanying computerprogram listing appendix on CD-ROM. This listing is generated using thegrid feature of XMLSpy from the XML data in the CD-ROM appendix. Theretirement timing goal 901 in the grid corresponds to the retirementtiming goal 801 of FIG. 8. The final retirement income goal 902 is oneof three instances of the association 811 between the retirement timinggoal 801 and the income goal 802.

While XML has emerged as a de facto standard for web-based data formats,translation among XML, relational database formats and object-orientedprogramming languages is challenging. The many schema languages devisedfor XML have various strengths and weaknesses. See, e.g., Lee, D. andChu, W. W. 2000. Comparative analysis of six XML schema languages.SIGMOD Rec. 29, 3 (September 2000), 76-87.http://doi.acm.org/10.1145/362084.362140 (last visited Apr. 24, 2006);Lee, D., Mani, M., and Chu, W. 2003. Schema Conversion Methods betweenXML and Relational Models in Omelayenko, B. and Klein, M. eds. KnowledgeTransformation for the Semantic Web. IOS Press, Amsterdam (last visitedApr. 24, 2006) <URL>; Mani, M. 2003. Data modeling using XML schemas.Dissertation, UCLA (last visited Apr. 24, 2006) <URL>.

The OMS disclosed supports code generation for JavaBeans, XML mappings,SQL queries, SQL DDL definitions and DAO library objects. The model isrich enough that other code generators could use OMS; an advantage ofOMS is that it reduces the dependence of the system on a particular codeor programming technology. As technologies evolve, code generators canbe written to use new technologies based on the existing OMS, withlittle or no modification of the OMS.

The retirement timing goal object can be thought of as a relationaldatabase table. In a language like Java, this object extends anotherobject definition, such as a retirement goal type. That is, it inheritssome properties from other definitions. This system treats a retirementtiming goal has a special kind of financial goal that aggregates severalother goals. Instead of minimum, target and maximum values, which areused for monetary targets, relevant timing values are depicted byreference 620 two DD entry and FIG. 7A. Model properties of theretirement timing goal object type support code generation of beans,classes, SQL and XML. A retirement timing goal is identified as aspecialization of a retirement goal. That is, it inherits properties ofa retirement goal in the class inheritance sense.

The final retirement income goal attribute and association can bethought of as a row in a relation table of a relational database.Admittedly, a relation table is typically used in relational databasesto implement an m:n relationship. Here, a retirement timing goal objectrelates to between one and three income goals. The association betweenthe retirement timing goal object and the final retirement income goalinstance of an income goal object can be thought of as a row in relationtable that has one to three rows. The three rows correspond to a fullemployment income goal, a partial retirement income goal and a fullretirement income goal. In the full OMS, these three associations areseparately defined.

The final retirement income goal definition 902 includes both anattribute and an association/association end pair. These structuresrepresent the same underlying data value in two alternative ways. Theattribute version is used in one embodiment by user interface metadatastructures, while the association is used by code and documentationgenerators. The reader will recognize that in these two alternativerepresentations can be reconciled and condensed to use only theassociation, as the attribute can be inferred from the association.

The association 902 attribute is named by qualifying the associationname by the domain table name. The domain reference is the retirementtiming goal table entry 801. The co-domain is one of up to three incomegoal table 802 entries. The corresponding association is named inparallel with the attribute. The association end includes two entriesfor objects at opposite ends of the association, namely the tables forretirement timing goals 801 and for income goals 802. These associationends are identified as co-domains. The association itself is the domainreference.

For both attributes and associations, model properties are given thatsupport code generation. Combining the model properties of attributesand associations will support inference of the attribute from theassociation.

Goal Balancing

A display useful for goal balancing is provided in FIGS. 21A-21B. Theclient has entered the basic client household information, includinglifetime resources and claims; it is useful to make sure the goals arerealistic and consistent with available resources and constraints. Aftercreating a new client household, is likely that the goals are not inbalance with resources available for obligations. Accordingly, it isuseful to adjust the goals and balance them with resources andobligations. Margin of safety percentages are a useful tool inaccomplishing this. Basic information for lifetime resources and claimsappears in the right hand column 2112, 2132. Only part of the claimsinformation 2132 is visible, due to screen limitations. A resources andgoals chart 2131 provides a graphic comparison of resources and claims.In this example, the present value of resources is $4 million, dividedamong investments, future job-related earnings (human capital),entitlements (pension) & insurance, and other. (We acknowledge that thechart does not match the amounts shown in the right column.) The claimsare categorized into liabilities, which must be satisfied, primarygoals, such as basic living expenses, secondary goals and additionalgoals. A margin of safety analysis provides a table 2111 and chart 2121that prominently analyze the margin of safety. In this example, theresources far exceed liabilities, leaving a substantial margin ofsafety. The resources match the liabilities plus primary goals, leavingno margin of safety. The secondary goals are reach 150 percent of theresources and the additional goals reach 200 percent of the resources,measured on a present value basis. Because the resources are inadequate,the margin of safety is negative.

During simulation, we apply funds, for instance, first to fund goals tolevel 1, then to level 2 and finally to level 3. Level 1 may beliabilities. Within a level funds are divided among goals equally. Toperform this calculation let CO₀=0 and CO₄=∞. Then there is a unique i<4such that CO_(i)≦R<CO_(i+1). Let X=R−CO_(i). If i=3 then every goal isfunded to the maximum level and there are excess funds X. If i<3 thenthere are no excess funds. The funding status of the retirement goal isFR=CR_(i)+(X/3). Similarly the funding status of the bequest and lumpsum objectives are FB=CB_(i)+(X/3) and FL=CL_(i)+(X/3). HereCR₀=CB₀=CL₀=0. The results of this funding allocation appear in variousreports.

Applying available resources preferably is constrained during simulationso that the estate is not depleted before the retirees die. Theso-called “longevity risk” is that resources will be exhausted prior todeath. It may be that the most basic goals, such as minimum requiredincome and meeting debt obligations, cannot be met in some cases, whichshould lead to reformulation of the minimum requirements (or may lead toan acceptance that retirement may be difficult). In the runs in whichminimum goals are satisfied, the simulation applies funds to successivelevels of goals and tracks the levels of funding (e.g., on a percentagebasis) achieved in each simulation run. As the resources available varyfrom run to run, so the level of goal funding does as well. In the runsthat produce sufficient resources to meet minimum requirements throughdeath, it is more useful for planning purposes to describe levels offunding attainable for various goals than to pick a particular spendinglevel and predict the year when the money runs out.

Margin of Safety and Lifetime Resources and Claims Statement

The margin of safety we define as a percentage margin between resourcesavailable and resources needed. To illustrate the margin of safety, thelifetime resources and claims statement depicted in FIG. 11 and themargin of safety graphs depicted in FIGS. 12-13 are useful. Other usefulillustrations include: a summary of goals by goal type, minimum, targetand maximum amounts, timing and goal priority; a timeline life events;table listing resources, value and percentages; the table listingclaims, value and percentage; and the graph of claim details, includingclaim breakdown, funding breakdown, obligation breakdown and goalbreakdown. The flow in FIG. 10 begins after creation of a new clienthousehold 1001. A customer or analyst reviews and considers the desiredmargin of safety 1002. Iteratively, simulations are run and theresulting margins of safety are considered for their adequacy 1004. Ifthe resulting margin is unsatisfactory, and evaluation is made of whichgoals to adjust to increase the margin of safety than 1005 preferablybeginning with the lowest priority goals. Adjustments are made 1006minimum, target and maximum values or, for timing goals, to lengthen theperiod of full or partial employment. The simulation is rerun and theimpact of adjustments on the margin of safety is evaluated 1009. Then,if the margin of safety remains inadequate, further determinations aremade regarding goal adjustment in 1005. If the margin is adequate, theadvisor or customer still may choose to modify investment strategies andpolicies 1008. Modifications lead to investment strategy instances 1003that can be tested and compared against one another.

Revisiting the lifetime resources and claims statement of FIG. 11, avalue figure appears next to each line item. Conceptually, the value ofan asset is an estimate of the after tax proceeds from an immediateliquidation of the asset. For an obligation, the value is the currentcost to retire or defer the claim. We also wish to estimate the value oftax deferral. Tax deferral represents the value due to postponingpayment of tax from now until the point of likely liquidation of theasset.

The standard lifetime resources and claims statement calculations are:market value=quantity×priceliquidation cost=haircut×market valuegain=market value−basistax=tax rate×gaindiscount factor=(1+risk free rate)^(−years to sale)present value of tax=discount factor×taxvalue tax deferral=tax−present value of taxnet value=market value−liquidation cost−tax−loan valueFor some assets the standard calculations are implemented as given. Butfor other assets the calculations require local modifications.

The lifetime resources and claims statement of FIG. 11 may be organizedin three parts: sellable assets, contingent sale assets and retainedassets. Sellable assets are those which can be sold as needed to raisefunds. Financial assets typically fall in this category. Contingent saleassets would normally only be sold under financial stress. Assets withsome emotional content such as homes and collections fall in thiscategory. Finally, retained assets are assets which either are notsellable or which one definitely plans on not selling. Interests in afamily business might fall in this category. For retained assets the taxis zero.

The lifetime resources and claims statement organizes its data in ahierarchical structure. In one embodiment, the highest level structureis:

I. Resources—Economic assets, further subdivided as

-   -   A. Marketable—Assets that can be sold for cash. Subdivided as        -   i. Liquid—Assets which are easily converted to cash        -   ii. Illiquid—Assets which take some time to convert to cash        -   iii. Restricted—Assets not fully available to the owner.            Within this group we organize the accounts first by owner            and second by type as per            -   a. Deferred Accounts (traditional IRA, 401k, Sep IRA)            -   b. Sheltered Accounts (Roth IRA, Coverdale, HSA)            -   c. Employee Incentive Compensation        -   iv. Contingent—Assets which owner could sell but intends not            to unless pressed to it    -   B. Income Producing—Assets that generate income but cannot be        sold    -   C. Reserve—Assets that cannot be sold and which do not generate        cash income    -   D. Informational—Assets which are “set aside” and not considered        in the analysis

II. Obligations—Contractual obligations not specifically tied toparticular resources.

III. Goals—Life aspirations

Within each resource group, we organize the accounts by owner, possiblyaccount type and alphabetically by account name. Within an account weorganize by asset class. Within an asset category we organizealphabetically by asset name or description and within an asset lots arelisted in time order.

Financial assets are reflected on the lifetime resources and claimsstatement. The key aspect of such assets is that they are held inaccounts and the nature of the account determines the tax treatment. Inregular accounts a quantity of an asset is purchased on a date for anamount termed its basis. The same asset may have been purchased onmultiple occasions, so each occasion represents a separate tax lot forthe asset. The gain on the asset is the difference between its currentvalue and tax basis. Depending on the nature of the asset and how longit has been held, one has different amounts of tax calculated on thegain. In tax sheltered accounts (e.g. IRAs) these calculations are doneon an account level rather than on an asset level. In consequence, oneno longer needs to know the purchase date and amount. It is sufficientto know the quantity held. Since one can ignore the purchase date, oneeffectively treats all holdings of an asset as belonging to the samelot. Thus the lot concept is unimportant in this setting.

The basic lifetime resources and claims statement presentation is

Market Value1 . . . Market ValueN Total Market Value (Transaction Cost)(Margin Loan) (Deferred Tax) Net ValueHere the first column is at the asset level and the second column at theaccount level. Market values are calculated by rolling lot quantities upto asset quantities and multiplying by a price. This price is eithermarket price, or if such is unavailable, a model price. Transactioncosts are calculated at the asset level as market value times a haircutpercentage that depends on the type of asset. These quantities areindividually small and only become interesting once rolled up to theaccount level. For regular accounts, gain is calculated at the lot leveland rolled up to the account level. If a net gain results then adeferred tax is calculated. If a net loss results then a loss carryforward (a type of tax asset) is created. For sheltered accounts the taxis calculated at the account level. Margin loans are shown at currentvalue as a reduction in net value.Tools for Understanding Simulation Results

The lifetime resources and claims statement, depicted in FIG. 11, is auseful tool for understanding simulation results. It presents a newframework for household portfolio simulation and analysis, moving towardproviding households with a plan that they can implement over theirlifetime. The lifetime resources and claims statement is dynamic andreasonably predictable. The view that it give broadly encompasses thehousehold's resources and goals, including a portfolio of investments.

Lifetime Resources and Claims Statement Case Study

The lifetime resources and claims statement (sometimes shortened to“lifetime R&C statement”) provides a snapshot of the estate at aparticular date, such as the date of full retirement or at the age of80. In this lifetime resources and claims statement, investments aregiven at market value. A home value is an estimated value. Human capitaland Social Security are actuarial present values. A mortgage has aremaining principal balance. Deferred taxes represent capital gain tounrealized gains and ordinary income to on withdrawals from retirementaccounts. Estimated income taxes are stated as the present value of taxon income resources. Valuation reserves are primarily transaction costsof asset liquidations. Rules are actuarial present value the discountrates chosen based on priority class. Rather than giving a balance sheetof assets and liabilities, this hybrid statement of resources and claimsis stated in terms of lifetime resources and claims, at a particulardate. The resources include traditional resources, such as retirementand investment accounts and stock options, plus home value, humancapital and Social Security benefits. The claims are grouped intoobligations, primary goals, secondary and additional goals and residualgoals. Categories such as obligations include entries such as mortgage,deferred taxes, estimated income tax and valuation adjustments. Theprimary, secondary and additional goals are set by the customer. Basicincome is a primary goal and additional income a secondary goal.Examples of other primary and secondary goals are education and basicbequest. An additional bequest or a charitable donation is an example ofan additional goal. Wealth building is typically a residual goal. Thelifetime resources and claims statement is particularly useful forbalancing lifetime resources and claims.

A case study of the Rockwells helps illustrate the lifetime resourcesand claims statement as an analytical tool. Anthony Rockwell is a50-year-old mid-level financial services executive, with a wonderfulfamily. His wife Julie, age 48, is a full-time homemaker and buddingartist. They have two children: Carrie, age 13, and Jake, age 10. Forthe last 10 years, they live in their four-bedroom, single-family homenear a major financial center, and they have 10 years left on their20-year mortgage. Carrie is a smart kid—she is definitely going to agood college. She also loves horses and is dreaming of becoming a vet.Jake's future is a bit less certain.

Anthony is planning to retire in 15 years at age 65. By that time thekids should have graduated from college. Upon retirement, Julie wantsthem to move to a smaller house in Arizona, but in the meantime themortgage needs to be paid. This is a relatively standard situation.

Let's analyze their resources in more detail. What do they have? Theyhave a four-bedroom, suburban home which has increased substantially invalue. In fact, it has almost doubled over the time they have livedthere. They will have earned the maximum social security benefit duringretirement. In terms of their accumulated investment assets, they haveactually been fairly big spenders in the past, so they don't have muchin the way of savings. There is $300 k in the corporate 401(k) plan and$100 k in taxable investments. Anthony and Julie's parents are gettingon in age, and it is realistic to expect that they will inheritapproximately $250 k in the next 10 years as their parent's estate isdivided among their siblings.

Anthony recently visited his local broker who told him, “Anthony, youare a moderate investor!” As such, Anthony was told that he should hold60% equity and 40% bonds. He left his broker with the warm fuzzy sensethat his asset allocation is non-controversial. It is diversified,appropriate for his level of “risk tolerance” and he believes that thiswon't get him into trouble. Again, a fairly typical situation.

Let's now take a look at this moderate asset allocation in a bit moredetail. This is the how it would typically break down for an investorlike Anthony. He might have $150 k in investments based on the LehmanAggregate and $150 k in the S&P 500 as the two principle investments inthe 401(k) account. These are the benchmarks against which the actualassets would be managed. As well, there is $100 k in the taxableaccount, split between a benchmark of the S&P 500 and the EAFE. Thiswould allocate 63% of his investments in equity, fifteen percent of thatin EAFE, or international equity, and 37% in fixed income. A traditionalapproach to summarizing the Rockwell's financial situation appears inthe table below:

Portfolio 401(k) Account Lehman Aggregate 150,000 S&P 500 150,000Taxable Account S&P 500  40,000 EAFE  60,000 Analysis Domestic Equity48% International Equity 15% All Equity 63% Fixed Income 37%

However, what if Anthony is not sure that he is a moderate investor? Infact, it is quite likely that Anthony hasn't the foggiest clue what a“moderate investor” means. While the advice is fairly standard and isprobably safe, is it the best advice? Can the Rockwell's do better?

How else can we analyze the Rockwells' situation? As described above, weshould go beyond just focusing on the assets and fussing about theminutiae of the asset portfolio structure. We need to take a holisticview, with an inventory of the full complement of their assets, andquestion whether these are sufficient to fund their goals.

Our departure from the traditional financial planning environment startswith a much better description of the Rockwells' circumstances, butfollowing an economic rather than cash flow perspective. First, we listall of the Rockwells' resources, the totality of their net assets thatthey can use to support their future aspirations and goals. Forsimplicity, we specify this list of resources after netting out theRockwells' day-to-day living expenses. The resources part of thelifetime R&C statement contains information such as depicted in thefollowing table:

Resources 401(k) Fund Securities 300,000 Deferred Tax  (30,000) NetValue 270,000 Taxable Account 100,000 All Investments 370,000 Socialsecurity 275,000 Home Market Value 1,500,000   Mortgage (424,000)Deferred Tax  (81,000) Net Home Equity 995,000 Human Capital Base Salary257,000 Bonus 289,000 Net Human Capital 546,000 Prospective Inheritance200,000 TOTAL RESOURCES 2,386,000  

In this table, the Rockwells' resources include the 401(k) plan, whichhas an associated deferred tax (approximately $30 k) liability, as theywill have to pay taxes when they withdraw funds from their 401(k). Ourview of this deferred tax is that it represents partial leverageadvanced by the IRS in the 401(k) plan. Combined with their taxableaccount, the sum of all of the Rockwells' investments is $370 k.

Next, there is Social Security. The actuarial present value of theSocial Security benefit for the Rockwells is approximately $275 k. Theyalso have their home, which has a current market value of $1.5M, and$424 k remaining on their mortgage. There is also a potential deferredtax liability when they sell their house since the gain is substantial.

Next, we factor in the Rockwells' human capital. For human capital, wefirst consider the incremental savings that can be applied fromAnthony's excess base salary in excess of living expenses that can beused to build up resources over time. The actuarial present value ofthis savings component is approximately one quarter of a milliondollars. We assume that Anthony is going to work until age 65. Though hemany not remain in his current job, we assume that he can probably getanother similar job with a similar base salary at some other firm. Thebonus component is a bit different. Anthony's bonus is based largely onfirm performance, which in turn is tied largely to the performance ofthe financial services sector. If the firm performs well, and thefinancial services sector has strong performance overall, Anthony doeswell. If financial services and his firm underperform, Anthony's bonusearnings will suffer. The present value of his bonus, taking intoaccount the risk inherent in it, is almost $300 k. In total, Anthony'shuman capital, net what is spent for living expenses, is a bit over halfa million dollars.

Finally, Anthony's prospective inheritance, which may occur over thenext ten years, is present valued at approximately $200 k.

Despite the fact that the Rockwell's have only $100 k in a taxableinvestment portfolio, if we consider this expanded view of the family'sresources, they are now actually worth $2.5 million.

One final comment on the Rockwells' list of resources. It appears to bequite diversified—real estate, human capital, and traditionalinvestments—but overall, it is relatively illiquid. Indeed, one canargue that the Rockwells are really not in control. What are thedecisions that the Rockwells can take? To some extent, with the benefitof an advisor, they can organize an investment strategy, but they don'thave much else to decide. Anthony can decide to change jobs or not towork, but if he decides not to work, a large part of the family'sresources, disappears.

In the lifetime R&C statement approach, the resources serve onepurpose—funding goals. Goals represent the other side of this lifetimeR&C statement.

What sort of goals? What could the Rockwells use these resources for?The Rockwells could certainly increase their level of spending and theirstandard of living, but their aspirations are directed elsewhere. Theyare focused on retirement in Arizona and college education for the kids.Let's take a close look at the implications (see table below). Weconsider the present value of the retirement income the Rockwells willneed, which is a bit over a million dollars. This assumes that theymaintain their present standard of living, and that they are likely tohave a more beneficial tax rate in retirement. They also want a house inArizona, so the overall retirement goal is approximately $1.7M.

Goals Retirement Income 1,178,000 House in Arizona 500,000 TotalRetirement 1,678,000 Education Carrie 250,000 Jake 116,000 Reserve forJake 110,000 Total Education 476,000 TOTAL GOALS 2,154,000 NET RESOURCES232,000

The Rockwells are also contemplating an Ivy League education for Carrie,starting five years from now, costing a quarter of a million dollars.They also need a reserve for Jake, because they want more or less thesame amount of funding for the two kids. The total education goal ishalf a million dollars, so the total amount of the goals is a littleover two million dollars. The net resources are $232 k, which representsthe excess of the Rockwells' resources over the present value of thegoals. Will they make it?

The net resources number is positive, but we must consider their “marginof safety,” which is the net resources as a percentage of totalresources. In the Rockwells' case the margin of safety is about 10%,which does not represent a great deal of safety. However, as we areworking with present value calculations at this point, it appears thatthey may make it.

So far our analysis has had no mention of risk. If we start byconsidering the risk of the fixed income component of their lifetime R&Cstatement, it turns out that it is fairly interesting, and also fairlyexotic. Their mortgage represents borrowing from a savings and loan, andthe Rockwells are in essence therefore short fixed income $424 k.

Modified Side Item Value ($) Duration Short Mortgage (424,000) 5 ShortDeferred Taxes (111,000) 28 Long Lehman Aggregate 150,000 4.5 LongSocial Security 275,000 22 Long Mortgage Prepay Options  8,400 n/a(101,600) 25.4

The Rockwells' mortgage is a 20-year fixed-rate mortgage at 5%, with amodified duration of about 5 years. They have a deferred tax obligationof $111 k from the future sale of their home and from 401(k) redemption.Because this is a long term obligation, the modified duration is 28years. On the long side, the Rockwells have three assets: the investmentin the Lehman Aggregate ($150 k), with a modified duration of 4.5 years,the Rockwell's Social Security benefit (Present Value=$275 k), with amodified duration of 22 years, and the embedded prepayment option on themortgage, which has a value of $8,400. The net value of the Rockwell'srather exotic fixed income portfolio, therefore, is $101,600 short witha modified duration of 25.4 years. As a result, this is a reallylong-term obligation with significant interest rate sensitivity.

The next question to ask is how the Rockwell's fixed income portfolioactually behaves as a result of the primary factors which drive interestrates, namely the real rate of interest and the rate of inflation. Thecomplex dynamics are obvious from the table shown below. If treasuryrates increase 100 basis points and the increase is due to a change inthe real rate, then the return will be negative and the obligation of$101,600 will increase to $132,000. However, if we believe the change intreasury rate arises from a change in inflation, the results aredifferent. Because much of the long portfolio is inflation neutral, thechange in the value is $30,600 for a rate of return of 38%. A similarlycomplex dynamic occurs when the treasury rates fall. If the fall is dueto a change in the real rate, then a positive return results, whereas ifit is due to inflation, the portfolio is neutral.

Change Return Scenario Due to Value ($) (%) Treasury rate rises Changein real (30,400) −35 100 bps rate Change in 30,600 38 inflation Treasuryrate falls Change in real 59,600 74 100 bps rate Change in   (400) 0inflation

Next, we turn to the equity portfolio, which is summarized in the tablebelow. When one views the world in a lifetime R&C statement approach,the simplicity of looking at assets alone goes away to some extent. Theequity component of the portfolio is composed of three assets: the S&P500, the EAFE, and the bonus component of Mr. Rockwell's salary. So thetotal equity component is $590 k and we see that the largest part is, infact, the bonus component of the salary. It is interesting to note thatthe S&P 500 has 20% exposure to the domestic finance sector, while thebonus component of the salary has an exposure of 100%. This is becauseMr. Rockwell's bonus is paid based on the firm's performance in thefinancial services sector. As a result, the total weight in the financesector of the Rockwell's equity portfolio is 61%. This is a far from awell-diversified portfolio. In fact, it is a highly concentratedportfolio which will behave almost completely in line with the financesector.

Equity Portfolio Value Finance Sector Item ($) Weight Exposure S&P 500190,000 35% 20% EAFE 60,000 11% 0% Salary, bonus 289,000 54% 100%component 539,000

What does this analysis of the Rockwell's fixed income and equityportfolio tell us about the risk that they bear in trying to meet theirgoals? One way of examining the risk is to look at the value-at-risk oftheir net resources. Their net resources are $232 k, but the value atrisk is $226 k. As such, the margin of safety that the Rockwells havecould easily be blown by a poor series of outcomes in the fixed incomeand equity markets. In fact, there is a one-in-forty chance that theycan expect the value-at-risk to be a minus $226 k. While this may notseem particularly serious in any particular year, over a five-yearplanning horizon, the risk is probably one year in eight.

Where is this risk coming from? It turns out that almost 70% of the riskis derived from the bonus compensation, while the direct investmentscontribute only 6% of the risk. More interesting, although the house isthe largest asset, it actually reduces their overall risk by 1%. This isbecause real estate is diversifying relative to the equity portfoliosand has a beneficial response to changes in interest rate and inflation.Finally, the retirement goal is responsible for 25% of the Rockwell'srisk. In terms of the overall exposures, one can view the bonuscompensation as being a major hotspot, as well as the risk of being ableto meet the retirement goal. One can think of these two risks as beingsimilar to a concentrated position in an equity portfolio.

In this case, rather than looking at individual assets, we are taking aholistic view of the Rockwells' entire financial picture. Our advice forthe Rockwells is that in order to have a satisfactory financial future,Anthony clearly needs to earn the bonus compensation. Furthermore, theyneed to track their progress towards their retirement goal very closely.

Let's discuss some observations regarding how we may further advise theRockwells. In an asset-only world, the structure of the asset portfolio,its tracking error relative to benchmark, and the overall expectedreturn is clearly important. However, in a lifetime R&C statement world,the financial plan is driven by the goals and whether the resources aresufficient to fund those goals. In the Rockwells' case, the bonus isclearly the most important source of funding. As a result, we wouldadvise the Rockwells to focus on earning the bonus. All the fussingabout whether the portfolio should be moderate or moderate-aggressive isrelatively unimportant.

A much larger issue is whether the assets are invested appropriately toeither earn a large expected return or to hedge the real asset risk. Ifwe want to invest to hedge the risk of the real assets, a radical ideawould be to use part of the assets to buy puts on the finance sector.Clearly, Mr. Rockwell's employers would find this potentially disloyal,as Mr. Rockwell is investing to profit on the financial servicessector's decline. However, from a family-oriented view, this is clearlynot an inappropriate strategy.

There are less radical ideas of course. There is some value torestructuring the fixed income component, probably by adding more TIPS.There is also significant value in shifting the domestic equity into theS&P 500, or perhaps a more broadly diversified equity fund ex-finance.With the introduction of products such as Sector SPDRs, such a strategycan be easily implemented. There may also be a reason to increase theEAFE holding to reduce the domestic finance exposure and the correlationwith the rest of the portfolio. It is interesting to note that few ofthese ideas would result from a traditional asset-only approach. Incontrast, a holistic, lifetime R&C statement approach provides morecoherent solution and could generate significant value.

It is also important to realize that the lifetime R&C statement willshift significantly over time and that the portfolio will need to adapt.One of the hallmarks of the lifetime R&C statement approach is that theinvestment process should be dynamic. Fortunately, this approach is bynature dynamic and somewhat predictable, because we have a good sense asto how the lifetime R&C statement will evolve over time. In particular,as indicated in the tables below, we see what happens to the Rockwells'lifetime R&C statement five years from our starting point, now ten yearsprior to their retirement. Amounts are given in future dollars, whichreflect the likely impact of inflation. You will see that theinvestments have increased from $370 k to $910 k. Their taxable accounthas increased quite substantially, as did the 401(k) plan. The presentvalue of the Social Security benefit has increased a bit, while netvalue of the Rockwells' home has increased quite dramatically, both froman increase in market value and the reduction in mortgage which has beenpaid down.

Resources 401(k) Fund Securities 440,000 Deferred Tax  (50,000) NetValue 390,000 Taxable Account 520,000 All Investments 910,000 Socialsecurity 295,000 Home Market Value 1,725,000   Mortgage (181,000)Deferred Tax (131,000) Net Home Equity 1,413,000   Human Capital BaseSalary 170,000 Bonus 191,000 Net Human Capital 361,000 TOTAL RESOURCES2,979,000  

The deferred tax is now $131K on realizing the investment in their home.In terms of the human capital, the present value of the savings fromAnthony's base salary is at $170 k, so the $170 k represents allocationsthat could be made to additional resources. The present value ofAnthony's bonus is $191 k, resulting in net human capital of $361 k.Finally, notice that the Rockwell's parents passed away and theyreceived a bequest which has been added into their investment resources.

Goals Retirement Income 1,473,000 House in Arizona 625,000 TotalRetirement 2,098,000 Education Carrie 312,500 Jake 145,000 Reserve forJake 137,000 Total Education 595,000 TOTAL GOALS 2,693,000 NET RESOURCES286,000

Let's now consider how the goals have changed. The present value of theRockwells' desired retirement income is almost $1.5M, and the presentcost of the house in Arizona is now $625 k, for a total retirementpresent value of $2,100,000. The education goal for Carrie has grown to$312,500, and for Jake $280,000, for a total present value of all goalsof almost $2,700,000. So the net resources have increased, but themargin of safety has not changed dramatically from five years prior.

It is interesting to see how the next five years will evolve, takingAnthony to a time which would be only five years from retirement. Forexample, Carrie's education goal is almost exactly funded by theRockwell's net human capital. Ironically, therefore, one can view theRockwells' remaining working life has to be almost entirely funding hischildren's education. In any event, it would appear critical for theRockwells to approach their situation as a dynamic one and to makeadjustments as their situation and priorities change.

There are an interesting set of questions regarding the investmentstrategies for the Rockwells. Could a fixed asset allocation of 60/40 bean appropriate asset structure for them? Would a life cycle fund be anadequate investment? Clearly it would be hard for a life cycle fund tobe designed to meet both the retirement goals and the educational goals.How about the investment strategy suggested earlier of investing in abroad-based equity strategy ex the domestic financial sector? Clearly,over the next five years, the Rockwells' human capital, which was thelargest part of the financial services exposure decreases, there is somevalue to moving back into the finance sector.

With regards to goals for the future, it is insightful to realize thatthe human capital is both dynamic and predictable, and should be used asa basis for designing an investment strategy. This is appropriate forthe Rockwells' needs.

So far, we have viewed the Rockwell's lifetime R&C statement as dynamic,but largely predictable. Clearly, within this structure we can usesimulation technology to give us a good view of how assets would evolveover time. This is technology that has been used widely and effectivelyin the financial planning community. However, there is another set ofvariables that needs to be simulated. This relates to the lifeexpectancy and the health of the Rockwells. This lifetime R&C statementapproach is a natural foundation for a joint simulation on both thegrowth of the asset and liability values or lifetime R&C statementevolution, and the life expectancy of the Rockwells.

Within this approach, one can set up a number of scenarios. For example,what levels and types of life insurance would be appropriate for theRockwells? By simulating the Rockwells' life expectancy, one canidentify the appropriate level of life insurance to minimize overallrisk. A related structure would determine whether or not disabilityinsurance for Anthony would be valuable. And, indeed, whether long-termassisted care might be an appropriate investment. Other questions thatcan be answered in the same framework relate to what happens if Anthonylost his job, if they did not receive the inheritance, or if socialsecurity were to be redefined.

The Rockwells' lifetime R&C statement is informative and a useful placeto start understanding their future financial success. It is the basisfor sensible and pragmatic financial planning, and we have found thatthis approach generates immediate client interest and attention.

In this approach, it is the portfolio of resources and goals, jointlydefined, which must be managed, not just the portfolio of investments.The investments are simply one part of the Rockwells' asset structureand should be managed not in isolation, but in conjunction with theother assets and liabilities. The liabilities, or goals, are a veryimportant part of the Rockwells' financial life. Finally, it is clearthat irrespective of whatever his day job is, Anthony Rockwell is ahedge fund manager. It is an ironic comment, given the media'sinfatuation with hedge funds, that Anthony Rockwell is not alone, sinceevery individual investor can, and should, also be viewed as a hedgefund manager, in that the “longs” (resources) and the “shorts” (goals)are strongly inter-related and cannot be viewed independently. Thisviewpoint offers much room for innovation in financial planning, and wewould argue a better client experience for the Rockwells and theirpeers.

Margin of Safety Analysis

Risk related to investment strategies and spending levels can be mademore understandable by applying a margin of safety analysis to aretirement plan and setting a risk budget. FIGS. 12 and 13 depictalternative ways of understanding a margin of safety. In FIG. 12, themargin of safety is the distance between the household resources, forinstance in an unfavorable case, and the claims remaining be satisfied.For most people in retirement, the available resources dwindle as theend of the planning horizon approaches. Retirement is understandablymore comfortable when the remaining claims are visibly less than theremaining resources. For this analysis, the resource trend depicted maysensibly be the normal trajectory of lifetime resources and claims,instead of a less favorable trajectory. FIG. 13 depicts a risk budget inrelationship to the margin of safety that can be seen in FIG. 12. Therisk budget is typically stated as the portion of asset value that maybe lost over the course of the year in one out of 20 simulations ofportfolio value, which corresponds to a 95% level of confidence. Othertime horizons can, of course, be used to express risk and the otherlevels of confidence, such as 90% or 97%, can be used. One use of FIG.13 is to alert a customer to whether the risk budget for a particularinvestment strategy is within the predicted margin of safety foravailable resources.

The next series of figures summarize the results of numerous simulationruns. These figures generally depict a random walk approach tosimulation. FIG. 14 depicts representative paths of total resources. Itshows that similar outcomes, represented by the upper for at lines mayseem to follow different ups and downs over the years some of them beingquite sharp. However, this kind of depiction of individual simulationcases needs to be summarized and aggregated to be very useful.

FIG. 15 depicts how, at each point in time, five cases can be selected.An unfortunate case can be the chosen so that 95% of the paths at thattime resulted in greater remaining resources. The unfavorable case canbe chosen so that 75% of the paths produce better results and 25%produce worse results. The normal case represents half of the paths anddoing better than half the cases doing worse. The favorable cases chosento do better than 75% of the paths. An unfortunate case is chosen to dobetter than 95% of the paths. In FIG. 15, these levels of fortune andmisfortune are depicted for a midpoint between 2015 in 2020. Byrepeating this process at each point in time and connecting trend lines,we get curves that are referred to as trajectories. For instance, thenormal trajectory is the curve formed by connecting together theselected normal case from each point in time.

FIG. 16 depicts the trajectories of total resources. The trajectoriesare smoother than any individual path. The jerkiness of individual pathsindicates how much things might change from period to period in thefuture, where as trajectories give us a sense of where paths might takeus over time. The normal trajectory gives a neutral indication of howthings might be expected to turn out. The favorable trajectory shows howthings could turn out in the future investment climate were favorable,while the unfavorable trajectory gives a sense of outcomes if theinvestment climate turns poor. In general, the normal trajectory may bebalanced with secondary and additional goals and even the unfortunatetrajectory should leave room to satisfy essential goals and minimumrequirements.

Goal achievement can be stated using the same five trajectories asdepicted in FIG. 16. Typically, the cost of obligations is independentof good fortune. The cost of primary goals may be slightly lower infortunate circumstances the unfortunate circumstances. The cost ofsecondary goals may increase with fortunate circumstances, for instance,as inflation carries the value of investments and the costs of meetinggoals upward. The percentage of obligations funded, primary goalsachieved, secondary goals achieved and additional goals achieved willvary depending on whether the unfortunate normal or fortunate case isconsidered. Residual funding may be realized only in fortunate orfavorable cases. Alternatively, goal achievement can be summarized bythe percentage of simulated paths that result in full funding of anobligation for a primary, secondary or additional goal. Yetalternatively, the average funding level of obligations and of primary,secondary and additional goals can be stated. Again, a reasonable planis expected to produce an average funding of 100% of obligations andprimary goals. Lesser percentages of full funding an average funding forsecondary and additional goals will be predicted by the simulation modelwhen lifetime resources and claims are relatively in balance.

FIG. 17 depicts two major adjustments in asset allocation along a normaleconomic trajectory through the course of life. In 2010, availableresources for shift in from real estate, such as the family home, intofixed income investments. In 2027, stock and fixed income assets arelargely converted to annuity payments. These conservative reallocationsof assets are intended to keep the risk budget within the margin ofresources and satisfy all claims.

The relationship between simulated risk and return is useful forcomparison of alternative investment strategies. FIG. 18 depicts riskand reward relationships for a personal investment opportunity 1801 andthe general investment opportunity 1802. The customer's currentportfolio 1803 and a proposed portfolio 1804 are contrasted. The use ofsimulation to place a current portfolio and proposed portfolio on agraph of risk and returns is a powerful way to generate meaningfulinformation from the sea of data that results when hundreds ofsimulation runs are performed.

FIGS. 19A-19B and 20A-20B present a cash flow and pro forma tax formreport generated by simulation. The cash flow analysis depicts resultsin particular years. The results in FIG. 19 roughly correspond to theasset shift depicted in FIG. 17. That is common FIG. 19A, annuitypayments are first realized in a column for 2030. Capital drawdown is nolonger necessary when the annuity payments began, as annuities exceedincome requirements. The pro forma tax report estimates for a particularyear the household's tax position based on a simulated investment plan.It is to assist in working with a tax advisor, not for reporting to theIRS. This tool takes advantage of the basis values entered for assetsthat are liquidated during the simulation period and other taxattributes known to the system, simulating the tax calculations thatapply, instead of taking an overall estimated tax rate that isinsensitive to tax realization when assets are liquidated and gainsrealized.

Some Particular Embodiments

The technology disclosed may be practiced as a method or device adaptedto practiced method. This technology may be embodied in an articlemanufacture such as computer readable media impressed with logic adaptedto simulating an interaction among income, assets and expenses.

A Method, Embodiments and Aspects

One embodiment is a computerized method of simulating resources andclaims of a household, including electronically receiving data regardinga household. The data represents responses to a questionnaire. Thequestionnaire covers at least plurality of positions in stocks andbonds. The information regarding these positions includes identificationof industry sectors for the stocks and bonds, if the industry sectorsare not automatically identified, for instance from a stock symbol. Thequestionnaire further may cover a home ownership, including a locationof the home and one or more household members' preferences fordisposition of the home. Disposition of the home may include borrowingmoney against the home, renting it, taking out a reverse mortgage(annuity) or selling it. The questionnaire further may cover anemployment prospect for at least one household member, who may bepresently employed, seeking employment or retired. The employmentprospect may be described by an identification the employer,identification of an industry sector for the employer, if the industrysector is not automatically identified, and the household member'spersonal expectations of future job-related earnings and job stability.Related to the employment prospect is a description of the householdmember's preferences for partial and/or full retirement. Thesepreferences may be expressed as definite dates or as a range of dates.

The method further includes creating a plurality of data structures fromthe received questionnaire data, including financial asset objects, ahome asset object and a human capital object. The financial assetobjects are adapted to represent the positions in stocks and bonds,including risk, return, allowable transaction types, cash flows and taxtreatment. The allowable transaction types can capture the illiquidityof some stocks or bonds. The tax treatment may capture relevant datesand basis amounts. The method further includes creating at least onehome asset object. The home asset object is adapted to represent thehome ownership, including risk, return, the preferences for dispositionof the home, cash flows and tax treatment. The method further includescreating at least one human capital object. The human capital object isadapted to represent the employment prospect, including at leastmilestones for future job-related earnings, full employment, partialretirement and full retirement. It further includes the industry sectorfor the household member and the household member's personalexpectations of job stability. For an employed individual, the industrysector of the household member may be represented by the industry sectorof the employer. The object further may include the household member'spersonal expectations of job-related earnings and job stability. Thejob-related earnings may include cash, stock options, retirement fundsand other forms of compensation.

The method further includes modeling in computer readable memoryeconomic interactions. Economic interactions may be between underlyingeconomic factors and the data: the positions, the home ownership and theemployment prospect. The various data objects are represented in themodel. The modeling takes into account the industry sector of thehousehold member and the industry sectors of the stocks and bonds,consequently, thereby modeling at least a risk of unemployment anddecreased earnings and a coincidence of risk between the positions andthe employment prospect. (It is not surprising to find that someoneemployed in an industry will feel comfortable investing in relatedindustries, even though doing so increases their risk related tounderperformance of that industry sector.) The method further includesrepeatedly running a probabilistic simulation to evaluate performance ofthe positions, the homeownership and the employment prospect. Thisincludes applying a plurality of a priori rules about liquidating thepositions in stocks and bonds, modifying household expenses and drawingdown equity and homeownership. The probabilistic simulation furtherincludes accounting for tax consequences of income flows resulting fromthe future job-related earnings and application of the a priori rules.The results of the simulation, at least in summary form, are reported insome form, either to a display or to memory, where they can bereferenced in the future.

A preferred way of using a priori rules in the probabilistic simulationis to apply them at the point in the simulation where choices are to bemade, without any preview or omniscience of the future course of thesimulation. This simulates what people do, selecting principles togovern their finances and applying the principles to the circumstancesthat they encounter.

One aspect of this is embodiment is that it may further includeelectronically receiving data corresponding to answers to aquestionnaire covering various household expenses. The various householdexpenses may include at least periodic living expenses, educationalexpenses, such as for household members or others, and real estateacquisition. The periodic living expenses may change with retirement.Educational expenses may be for children, grandchildren or relatives.Real estate acquisition may include, for instance, buying or selling avacation home or moving to a different, larger or smaller home. Thisaspect further includes electronically receiving desirability ratings ofthe various household expenses and alternative levels of funding for thevarious household expenses. The method further may include creating atleast one household expense object as a data structure from the data.The household expense object is adapted to represent one of the varioushousehold expenses, including at least expense amounts and expensetiming and the desirability ratings and the alternative levels offunding. With alternative levels of funding specified, the reporting mayinclude whether full or partial funding of the various householdexpenses is achieved. For instance, it may be desirable but notessential to buy a retirement condominium. Or, there may be alternativelevels of discretionary spending. The reporting may indicate, forinstance, the percentage of the simulations in which there was enoughmoney available to buy the retirement condominium.

Another aspect that may be combined with any of the embodiments aboveincludes electronically receiving data regarding questions aboutentitlements. Typical entitlements include eligibility for SocialSecurity and eligibility for pension payments. These entitlements mayapply to some or all household members. This aspect further includescreating at least one miscellaneous income object as a data structurefrom the data. The miscellaneous income object is adapted to representthe entitlements, including at least milestones for income from theentitlements, indexing of the entitlements over time and survivorbenefits payable to other household members. Then, the modeling incomputer readable memory includes the entitlements along with otherincome and assets available to meet various household expenses.

Household expenses to be considered further may include paying down amortgage on the home ownership. The questionnaire may further cover amortgage type, mortgage terms and a desirability rating for early payoffof a mortgage. Retiring other debts also may be treated as a householdexpense.

Loosely categorized as a household expense, this computerized methodfurther may cover donating to a charity. The questionnaire coveringdonating to a charity may cover a beneficiary name, whether cash orappreciated property is to be donated, an amount or specific property tobe donated, a date or range of dates when the donation should occur anda desirability rating for the donation. Similarly, the so-calledhousehold expenses may include leaving a bequest. The questionnairecovering the bequest may cover a beneficiary name, whether cash orappreciated property is to be bequest, an amount or specific property tobe bequest and a desirability rating for the bequest.

Household expenses further may include supporting a family memberoutside the household. For instance, supporting a parent or a relative.

Among the list of household expenses given, three, four, more or anycombination that includes at least periodic living expenses may besimulated using the technology described.

The probabilistic simulation that is repeatedly run may includesimulating by period over time the interaction and resulting resourcesavailable to satisfy the various household expenses. Practicing thisaspect of the technology may further include following the a priorirules to apply the resources available in a particular period to satisfythe household expenses, first satisfying obligations including themortgage and the tax consequences, then satisfying base levels offunding for the household expenses that have a high desirability rating.After satisfying the base levels, the resources available can be appliedconsistent with the desirability ratings and the alternative levels offunding to other household expenses. As dictated by scarce resources,some household expenses may be left unsatisfied, including beingpartially satisfied at a lower alternative level of funding.

Regarding educational expenses, the questionnaire may further elicit abeneficiary name, school name, type of educational institution for theschool, expected years of attendance, current cost of attendance, levelsof funding toward a future cost of attendance and desirability ratingsfor the levels of funding. Some of the questionnaire subjects may beautomatically detected and entered with or without confirmation, basedon the name of the school. As a further aspect, the modeling may includeadjusting the current cost of attendance automatically using an index ofeducational cost increases. This index can be applied consistent withthe underlying economic factors to reach a future cost of attendancecoincident with the expected years of attendance. A further aspect mayinclude covering in the questionnaire a preference between accumulatingfunds in a tax-advantaged account versus drawing from undesignatedresources available during the expected years of attendance withoutpre-funding in a tax-advantaged account. This will impact the years inwhich the school expense is funded.

An Extended Method

This method may be extended to summarizing household resources andclaims as of a particular date in the future. By that future date,resources and claims will have evolved and a priori rules will have beenapplied. The resources and claims as of that particular date in thefuture can be based on one or more results of repeatedly running aprobabilistic simulation from the present through the particular date inthe future to evaluate performance of the positions, the home ownershipand the employment prospect and satisfaction of the household expenses,including applying the plurality of a priori rules and accounting fortax consequences of income flows resulting from the future job-relatedearnings and application of the a-priori rules. From the simulation, theresources and the claims as of the particular date in the future arederived from one or more results of repeatedly running the probabilisticsimulation. A mean or median path of simulation may be selected or anaverage across all simulations.

This extended method includes evaluating, for the particular date,actuarial present value balances of at least the employment prospect,the entitlements, the household expenses, and tax consequences of theemployment prospect and tax-deferred gains in the home ownership and thepositions in stocks and bonds. Among the data object types, some aregiven an estimated present value and others are given an actuarialpresent value balance. Positions in stocks and bond and a home ownershipcan be sold, so an actual or estimated present value is used. Humancapital and household expenses are yet to unfold, so an actuarialpresent value balance is more appropriate. Accordingly, the method mayinclude summarizing for the present values on the particular date ofcertain resources and claims, including the positions in stocks andbonds, the home ownership and deferred taxes on gains in the positionsand the home ownership, and summarizing the actuarial present valuebalances of other resources and of the claims, organized into groups ofthe resources and the claims. In the summary, a base level of livingexpenses, the tax consequences and the mortgage payments may be grouped,thereby representing obligations, and other of the household expensesmay be organized by the desirability ratings of the household expenses,thereby representing at least primary and secondary goals among thehousehold expenses.

An optional aspect of this method is that the various household expensesmay be subject to different discount rates when calculating theactuarial present value balances. Obligations are unvarying, so arelatively lower discount rate should be applied to the obligationsthan, for instance, to the secondary goals. This corresponds tohistorical rates of return on very stable investments that can be usedto assure funding of obligations, as opposed to riskier and potentiallymore profitable investments that can be used to reach funding levelsnecessary to achieve secondary goals. A logical consequence of varyingdiscount rates is that demoting a financial goal from essential tosecondary, for instance, will make it more affordable, but less certainto be accomplished, if the investment opportunities are matched to goalpriority.

This method of summarizing a lifetime of resources and claims furtherincludes reporting a residual (or deficit) of the resources exceedingthe claims, thereby reflecting wealth building.

A System, Embodiments and Aspects

As a computerized system, the technology described includes a systemthat simulates pre- and post-retirement income streams, assets andexpenses and applies preferences for trade-offs among financial goals.Features of the system may implement any of the methods or aspects ofmethods described herein. In particular, the system may include aprocessor, at least one memory coupled to the processor, and thesimulation module, operative on the processor and the memory.

The system further includes a collection of data structures in thememory. The data structures are populated from electronically receivedresponses to a questionnaire. The data structures include financialasset objects, a home asset object, a human capital object and a priorirules. The financial asset objects are adapted to represent thepositions in stocks and bonds, including risk, return, allowabletransaction types, cash flows and tax treatment. The allowabletransaction types can capture the illiquidity of some stocks or bonds.The tax treatment may capture relevant dates and basis amounts. The homeasset object is adapted to represent the home ownership, including risk,return, the preferences for disposition of the home, cash flows and taxtreatment. The human capital object is adapted to represent theemployment prospect, including at least milestones for futurejob-related earnings, full employment, partial retirement and fullretirement. It further includes the industry sector for the householdmember and the household member's personal expectations of jobstability. For an employed individual, the industry sector of thehousehold member may be represented by the industry sector of theemployer. The object further may include the household member's personalexpectations of job-related earnings and job stability. The job-relatedearnings may include cash, stock options, retirement funds and otherforms of compensation. The a priori rules address at least liquidatingthe positions in stocks and bonds, modifying household expenses anddrawing down equity and homeownership.

The system further includes a model in computer readable memoryrepresenting economic interactions. Economic interactions may be betweenunderlying economic factors and the data: the positions, the homeownership and the employment prospect using the financial asset objects,the home asset object and the human capital object. The model takes intoaccount the industry sector of the household member and the industrysectors of the stocks and bonds, consequently, thereby modeling at leasta risk of unemployment and decreased earnings and a coincidence of riskbetween the positions and the employment prospect.

The system further includes simulation logic, run by the simulationmodel, operative to repeatedly execute a probabilistic simulation toevaluate performance of the positions, the homeownership and theemployment prospect. This includes applying a plurality of a priorirules about liquidating the positions in stocks and bonds, modifyinghousehold expenses and drawing down equity and homeownership. Theprobabilistic simulation further includes accounting for taxconsequences of income flows resulting from the future job-relatedearnings and application of the a priori rules. The results of thesimulation, at least in summary form, are reported in some form, eitherto a display or to memory, where they can be referenced in the future.

Again, the system may implement the methods, embodiments of methods andaspects of methods described above. For instance, the data objects ofthe system further may include one or more miscellaneous income objectsas data structures adapted to represent entitlements to social securityand/or pension payments, including at least milestones for income fromthe entitlements, indexing of the entitlements over time and survivorbenefits payable to other household members from the entitlements.According to this aspect, the simulation logic may take into accountincome from the miscellaneous income objects when applying the a-priorirules.

Another Method Resembling the Extended Method

Another method described is a method of summarizing household resourcesand claims through a future lifetime as of a particular date, which isuseful when a household is balancing proposed claims against theresources. This method includes accessing a collection of datastructures in computer readable memory. The data structures may includefinancial asset objects, a home asset object, a human capital object, amiscellaneous income object and a plurality of household expenseobjects. The financial asset objects are adapted to represent thepositions in stocks and bonds, including risk, return, allowabletransaction types, cash flows and tax treatment. The allowabletransaction types can capture the illiquidity of some stocks or bonds.The tax treatment may capture relevant dates and basis amounts. Themethod further includes creating at least one home asset object. Thehome asset object is adapted to represent the home ownership, includingrisk, return, the preferences for disposition of the home, cash flowsand tax treatment. The method further includes creating at least onehuman capital object. The human capital object is adapted to representthe employment prospect, including at least milestones for futurejob-related earnings, full employment, partial retirement and fullretirement. It further includes the industry sector for the householdmember and the household member's personal expectations of jobstability. For an employed individual, the industry sector of thehousehold member may be represented by the industry sector of theemployer. The object further may include the household member's personalexpectations of job-related earnings and job stability. The job-relatedearnings may include cash, stock options, retirement funds and otherforms of compensation. The one miscellaneous income object is adapted torepresent entitlements to a social security benefit or a pensionbenefit, including at least milestones for income from the entitlements,indexing of the entitlements over time and survivor benefits payablefrom the entitlements. The plurality of household expense objects areadapted to represent various household expenses, one of the householdexpense objects including at least expense amounts and expense timing, adesirability rating for a particular household expense and alternativelevels of funding for the particular household expense.

The method further includes evaluating, for a particular date, actuarialpresent value balances of at least the employment prospect, theentitlements, the household expenses, and tax consequences of theemployment prospect and tax-deferred gains in the home ownership and thepositions in stocks and bonds. Among the data object types, some aregiven an estimated present value and others are given an actuarialpresent value balance. Positions in stocks and bond and a home ownershipcan be sold, so an actual or estimated present value is used. Humancapital and household expenses are yet to unfold, so an actuarialpresent value balance is more appropriate. Accordingly, the method mayinclude summarizing for the particular date present values of certainresources and claims, including the positions in stocks and bonds, thehome ownership and deferred taxes on gains in the positions and the homeownership, and the actuarial present value balances of other resourcesand of the claims, organized into groups of the resources and theclaims. In the summary, a base level of living expenses, the taxconsequences and the mortgage payments may be grouped, therebyrepresenting obligations, and other of the household expenses may beorganized by the desirability ratings of the household expenses, therebyrepresenting at least primary and secondary goals among the householdexpenses.

An optional aspect of this method is that the various household expensesmay be subject to different discount rates when calculating theactuarial present value balances. Obligations are unvarying, so arelatively lower discount rate should be applied to the obligationsthan, for instance, to the secondary goals. This corresponds tohistorical rates of return on very stable investments that can be usedto assure funding of obligations, as opposed to riskier and potentiallymore profitable investments that can be used to reach funding levelsnecessary to achieve secondary goals. A logical consequence of varyingdiscount rates is that demoting a financial goal from essential tosecondary, for instance, will make it more affordable, but less certainto be accomplished, if the investment opportunities are matched to goalpriority.

This method of summarizing a lifetime of resources and claims furtherincludes reporting a residual (or deficit) of the resources exceedingthe claims, thereby reflecting wealth building.

As a further aspect of this method, early retirement may be treated as aclaim, when a range of dates are provided for potential retirement, andgrouped according to a desirability rating of the early retirement.

For some purposes, it may be desirable to summarize household resourcesand claims at a particular date in the future, as opposed to today. Bythat future date, resources and claims will have evolved and a priorirules will have been applied. The resources and claims as of thatparticular date in the future can be based on one or more results ofrepeatedly running a probabilistic simulation from the present throughthe particular date in the future, following the methods and aspects ofmethods described above. In more detail, embodiment of the method mayinclude accessing a data structure in memory adapted to represent aplurality of a priori rules about preferences for liquidating thepositions in the stocks and bonds, modifying household expenses anddrawing down equity in the home ownership. It further includes accessinga model in computer readable memory that represents economic interactionamong underlying economic factors, the positions, the home ownership andthe employment prospect using the financial asset objects, the homeasset object and the human capital object, taking into account theindustry sector of the household member and the industry sectors of thestocks and bonds. Repeatedly running a probabilistic simulationevaluates performance of the positions, the home ownership and theemployment prospect and satisfaction of the household expenses,including applying the plurality of a priori rules and accounting fortax consequences of income flows resulting from the future job-relatedearnings and application of the a-priori rules. From the simulation, theresources and the claims as of the particular date in the future arederived from one or more results of repeatedly running the probabilisticsimulation. A mean or median path of simulation may be selected or anaverage across all simulations.

A General Method

A general method describes and refines retirement-related objectives fora household, producing results that are useful for lifetime planning.The general method includes, for the household members, collecting dataon computer-accessible storage media including a plurality of futurewage scenarios (hereinafter “FWSs”). The FWSs include at least plannedand latest dates of partial and/or full retirement and a range ofexpected wage levels prior to retirement. They also include eligibilityfor social security and pensions. This method further includesautomatically converting the household members' data into financialterms suitable for simulation. For the household, the method includescollecting data on computer-accessible storage media including economicdescriptions of a plurality of assets including at least investments anda family home, a plurality of future income requirements (hereinafter“FIRs”) for living expenses, segmented at least by age or retirementstatus of the household members, the FIRs including at least planned andminimum requirements for living expenses. The household data collectionfurther addresses concrete life objectives beyond the FIRs. The concretelife objectives may be elicited in terms of accomplishing predeterminedgoals, meaning eliciting data specific to the predetermined goals andnot simply eliciting a generic cash flow and naming it. Thepredetermined goals cover at least four of: paying down a mortgage onthe family home; retiring other debt(s) of the household members;putting a child through school; donating to a charity; leaving abequest; supporting a family member other than the household members;and disposition of the family home.

The general method further includes automatically converting thehousehold's data into financial terms suitable for simulation.Simulating by period, using the collected data for the household membersand the household, walks through a range of future economic conditionsand their impact on at least the investments, the family home and theFWSs and on the FIRs. The simulation also walks through the interactionbetween resources and goals, beyond the latest dates of full retirement.It calculates resulting satisfaction of at least planned and minimumFIRs and, as resources permit, funding of additional financial goals.This method includes storing on computer-accessible storage media atleast summary simulation results or displaying the results on a displaydevice.

This method may be applied to a plurality of household members having atleast some individual objectives. According to the method, collectinghousehold member data on computer-accessible storage media may furtherinclude collecting at least planned and latest dates of partial and/orfull retirement.

Another aspect of the method ma include, for the household, collectingrelative priorities among the concrete life objectives and planned andminimum FIRs. Then, when simulating by period the funding over time,applying funds available in a particular period successively to meethigh priority objectives, including at least the minimum FIRs, thenapplying the funds available consistent with the relative priorities.According to this aspect, the funds available in a particular period maybe limited automatically, such that at least the minimum FIRs are metuntil the household members reach simulated deaths. The method storesstoring on computer-accessible storage media at least summary results ofthe simulation indicating at least a degree of success in funding ofplanned FIRs and the concrete objectives.

An alternative aspect of this method, that may be combined with otheraspects above, includes following up on a predetermined goal of payingdown a mortgage on the family home further by eliciting a mortgage typeand mortgage terms adapted to the mortgage type and eliciting a goal topay off the mortgage early.

Another alternative aspect includes following up on a predetermined goalof retiring other debt(s) of the household members by eliciting type ofdebt, periodic obligations and lump sum obligations adapted to that debttype and eliciting a goal to pay off the debt pay-off earlier thanrequired by the terms of the debt.

Following up on a predetermined goal of putting the child through schoolmay include eliciting a beneficiary name, a school name, a type ofeducational institution for the school, expected years of attendance,current cost of attendance, and a relative priority of the putting thechild through school goal. This follow-up may carry through to adjustingthe current cost of attendance automatically using an index ofeducational cost increases and consistent with the simulated economicconditions.

Following up on the putting the child through school goal may furtherinclude eliciting a plurality of percentages of the adjusted cost ofattendance to be paid out of available resources and relative prioritiesamong the plurality of percentages. For instance, a higher priority topay half the cost of college education than to pay the whole cost.Following up may further include eliciting a choice among accumulatingfunds in a tax advantaged account or drawing from general resourcesduring the years of attendance.

In yet another aspect, following up on the predetermined goal ofdonating to the charity may include eliciting a beneficiary name,whether cash or appreciated property is to be donated, an amount orspecific property to be donated, a date or range of dates when thedonation should occur and a relative priority of the donation.

Similarly, following up on the predetermined goal of leaving the bequestmay includes eliciting a beneficiary name, whether cash or property isto be bequest, an amount or specific property to be bequest, and arelative priority of the bequest.

Eliciting details of the predetermined goal of supporting the familymember other than the household members may include eliciting abeneficiary name, an amount of support in current dollars and expectedyears of support.

Eliciting the predetermined goal for disposition of the family home mayinclude eliciting a relative priority of retaining the family home fromcategories in a range spanning at least: sell in a particular timeframe; sell if necessary; or hold. For at least some alternativedispositions (e.g., other than hold), it may include eliciting a homebasis and a date of acquisition event related to tax consequences, anapproximate current value, a market location information from which anincrease or decrease in value can be simulated, and whether the familyhome will be replaced by purchase of other real estate.

When collecting the economic descriptions of investments, the datacollected may include eliciting liquidity, selected from predeterminedcategories spanning at least the range of immediately liquid market withprices published daily to limited liquidity with prices negotiated pertransaction to limited control over liquidation.

When simulating by period, the economic conditions modeled may producevaried sets of potential conditions for at least inflation, interestrates and economic expansion that are self-consistent within a periodand between successive periods.

Applying this method, collecting the economic descriptions ofinvestments data may further include eliciting investment basis and adate of acquisition event related to tax consequences. Then, simulatingby period can utilizes the investment basis and the acquisition eventdate to evaluate tax consequences of tax realization events. As with theother aspects and further included features, this feature can optionallybe combined with virtually any of the foregoing aspects, features orembodiments.

Any of the methods or systems described above can be enhanced byproducing from the simulation results a comparison of a present value ofavailable resources, a present value of claims against the availableresources and a margin of safety by which the available resources shouldexceed the claims. In some presentations, the comparison is presented asa graph over time of the present value of available resources, thepresent value of claims against the available resources and the marginof safety by which the available resources should exceed the claims.

It is useful, optionally, for the eligibility data collected for socialsecurity eligibility to conform to government reporting of eligibility,either as reported on paper or in response to an electronic query. Then,the simulating further includes applying rules for determining socialsecurity benefits that take into account simulated date of retirement,simulated income during partial retirement and simulated survival of onewager earner after the death of an other wage earner.

Similarly, it is useful, optionally, for the eligibility data collectedfor pension eligibility to conform to a pension fund statement ofeligibility, either as reported on paper or in response to an electronicquery. Again, the simulating will then further include applying pensionfund rules for determining pension benefits, including rules fordetermining pension amount, taking into account simulated date ofretirement, simulated income during partial retirement and simulatedsurvival of one wager earner after the death of an other wage earner.

Optionally, when one of the investments is in real property, the methodmay include eliciting a real property sale goal, including eliciting arelative priority of retaining the real property from categories in arange spanning at least sell in a particular time frame, sell ifnecessary, or hold. For at least some relative priority categories,eliciting a real property basis and a date of acquisition event relatedto tax consequences, an approximate current value, an approximate targetdate of sale, either by age, year or relative to retirement date; andmarket location information from which an increase or decrease in valuecan be simulated. While the present invention is disclosed by referenceto the preferred embodiments and examples detailed above, it isunderstood that these examples are intended in an illustrative ratherthan in a limiting sense. Computer-assisted processing is implicated inthe described embodiments. Accordingly, the technology described may beembodied in methods for simulating resources and claims of a householdand for stating lifetime resources and claims of the household insummary form. The technology may be incorporated in a system includinglogic and resources to simulate resources and claims of a household andto summarize lifetime resources and claims of the household, systemsthat take advantage of computer-assisted simulating of resources andclaims of a household and/or for stating lifetime resources and claimsof the household in summary form, media impressed with logic to carryout the simulating and/or summarizing methods, data streams impressedwith logic to carry out he simulating and/or summarizing methods, orcomputer-accessible services that carry out computer-assisted simulatingand/or summarizing methods. It is contemplated that modifications andcombinations will readily occur to those skilled in the art, whichmodifications and combinations will be within the spirit of theinvention and the scope of the following claims.

We claim as follows:
 1. A method of summarizing household resources andclaims through a future lifetime as of a particular date, therebyenabling a household to balance the claims against the resources over atime horizon, the method including: accessing a collection of datastructures in computer readable memory, including a plurality offinancial asset objects adapted to represent positions in financialassets, including risk, return, and cash flow, at least one real estateobject adapted to represent a real estate holding, including risk andreturn, mortgage obligations, whether the real estate is a residence,and one or more household members' preferred disposition of the realestate, a plurality of household expense objects adapted to representvarious household expenses, the household expense objects including atleast expense amounts and expense timing, and a desirability rating fora particular household expense; and evaluating using a processor andsummarizing for a particular date actuarial present values of resourcesand claims, the resources and claims including at least the positions infinancial assets, the real estate, and the household expenses, thesummary organized into groups of the resources and the claims, wherein abase level of the household expenses and obligations including mortgagepayments for the real estate are grouped together as obligations, andother of the household expenses are organized by the desirabilityratings of the household expenses, thereby representing at least primaryand secondary goals among the household expenses, and and a residual (ordeficit) of the resources exceeding (or failing to satisfy) the claimsis reported, thereby reflecting wealth building.
 2. The method of claim1, further including: accessing the plurality of household expenseobjects further adapted to represent alternative levels of funding forthe particular household expense; and using the alternative levels offunding to establish at least at least two levels of goals among thehousehold expenses, wherein the summary is organized to distinguishbetween the two levels of goals.
 3. The method of claim 2, furtherincluding repeatedly running a probabilistic simulation to evaluateperformance of at least the financial assets and the real estate,including applying a plurality of a-priori rules about liquidating thepositions in the financial assets, modifying the household expenses andusing equity in the real estate to satisfy the claims.
 4. The method ofclaim 3, further including: accessing the collection of data structuresin computer readable memory, wherein at least the financial assetobjects and the real estate object are adapted to include tax attributedata; and evaluating using the processor tax consequences at least ofliquidating positions in the financial assets and using financial equityin the real estate; wherein the summary organized into groups includesthe tax consequences grouped with the obligations.
 5. The method ofclaim 3, further including executing the a-priori rules in theprobabilistic simulation based on a state of the simulation when achoice is to be made, without previewing a future course of theprobabilistic simulation.
 6. The method of claim 3, further including:accessing the collection of data structures in computer readable memory,further including at least one educational expense object that isadapted to represent at least a beneficiary name, a school name, a typeof educational institution for the school, expected years of attendance,a current cost of attendance, and alternative levels of funding toward afuture cost of attendance; and evaluating using the processor futureeducational expenses represented by the educational expense object;wherein the summary organized into groups includes the alternativelevels of funding the future educational expenses with the primary andsecondary goals.
 7. The method of claim 6, further includingautomatically adjusting the current cost of attendance using an index ofeducational cost increases, consistent with at least the type ofeducational institution and the expected years of attendance.
 8. Amethod of summarizing household resources and claims through a futurelifetime as of a particular date, thereby enabling a household tobalance the claims against the resources over a time horizon, the methodincluding: accessing a collection of data structures in computerreadable memory, including a plurality of financial asset objectsadapted to represent positions in financial assets, including risk,return, and cash flow, at least one human capital object adapted torepresent an employment prospect of a household member, including atleast expected future job-related earnings, and preferred dates ofpartial retirement and full retirement, a plurality of household expenseobjects adapted to represent various household expenses, the householdexpense objects including at least expense amounts and expense timing, adesirability rating for a particular household expense and alternativelevels of funding for the particular household expense; and evaluatingusing a processor and summarizing for a particular date actuarialpresent values of resources and claims, the resources and claimsincluding at least the positions in financial assets, the employmentprospect and the household expenses, the summary organized into groupsof the resources and the claims, wherein a base level of the householdexpenses as obligations, and other of the household expenses areorganized by the desirability ratings of the household expenses andusing the alternative levels of funding, thereby representing at leastprimary and secondary goals among the household expenses, and and aresidual (or deficit) of the resources exceeding (or failing to satisfy)the claims is reported, thereby reflecting wealth building.
 9. Themethod of claim 8, wherein the human capital object is further adaptedto represent alternative dates of the early retirement, furtherincluding treating the early retirement as a claim, wherein the summaryorganized into groups includes the alternative dates of the earlyretirement with the primary and secondary goals.
 10. The method of claim8, further including repeatedly running a probabilistic simulation toevaluate performance of at least the financial assets and the employmentprospect, including applying a plurality of a-priori rules aboutliquidating the positions in the financial assets and modifying thehousehold expenses to satisfy the claims.
 11. The method of claim 9,further including: accessing industry sector data that identifiesindustry sectors of the financial asset objects and the employmentprospect; and when running the probabilistic simulation, taking intoaccount covariance among the industry sectors.
 12. The method of claim10, further including, when running the probabilistic simulation, takinginto account risks of unemployment related to the employment prospect.13. The method of claim 9, further including executing the a-priorirules in the probabilistic simulation based on a state of the simulationwhen a choice is to be made, without previewing a future course of theprobabilistic simulation.
 14. The method of claim 8, further including:accessing the collection of data structures in computer readable memoryincluding at least one real estate object adapted to represent a realestate holding, including risk and return, mortgage obligations, whetherthe real estate is a residence, and one or more household members'preferred disposition of the real estate; and evaluating the actuarialpresent values of the resources and claims, further including the realestate, wherein obligations including mortgage payments for the realestate are grouped together with the base level of the householdexpenses as obligations.
 15. The method of claim 8, further including:accessing the collection of data structures in computer readable memory,further including at least one educational expense object that isadapted to represent at least a beneficiary name, a school name, a typeof educational institution for the school, expected years of attendance,a current cost of attendance, and alternative levels of funding toward afuture cost of attendance; and evaluating using the processor futureeducational expenses represented by the educational expense object;wherein the summary organized into groups includes the alternativelevels of funding the future educational expenses with the primary andsecondary goals.
 16. The method of claim 14, further includingautomatically adjusting the current cost of attendance using an index ofeducational cost increases, consistent with at least the type ofeducational institution and the expected years of attendance.
 17. Anon-transitory machine readable memory including computer instructionsthat instruct a processor to: access a collection of data structures incomputer readable memory, including a plurality of financial assetobjects adapted to represent positions in financial assets, includingrisk, return, and cash flow, at least one real estate object adapted torepresent a real estate holding, including risk and return, mortgageobligations, whether the real estate is a residence, and one or morehousehold members' preferred disposition of the real estate, a pluralityof household expense objects adapted to represent various householdexpenses, the household expense objects including at least expenseamounts and expense timing, and a desirability rating for a particularhousehold expense; and evaluate and summarize for a particular dateactuarial present values of resources and claims, the resources andclaims including at least the positions in financial assets, the realestate, the employment prospect and the household expenses, the summaryorganized into groups of the resources and the claims, wherein a baselevel of the household expenses and obligations including mortgagepayments for the real estate are grouped together as obligations, andother of the household expenses are organized by the desirabilityratings of the household expenses, thereby representing at least primaryand secondary goals among the household expenses, and and a residual (ordeficit) of the resources exceeding (or failing to satisfy) the claimsis reported, thereby reflecting wealth building.
 18. A non-transitorymachine readable memory including computer instructions that instruct aprocessor to: access a collection of data structures in computerreadable memory, including a plurality of financial asset objectsadapted to represent positions in financial assets, including risk,return, and cash flow, at least one human capital object adapted torepresent an employment prospect of a household member, including atleast expected future job-related earnings, and preferred dates ofpartial retirement and full retirement, a plurality of household expenseobjects adapted to represent various household expenses, the householdexpense objects including at least expense amounts and expense timing, adesirability rating for a particular household expense and alternativelevels of funding for the particular household expense; and evaluatingusing a processor and summarizing for a particular date actuarialpresent values of resources and claims, the resources and claimsincluding at least the positions in financial assets, the employmentprospect and the household expenses, the summary organized into groupsof the resources and the claims, wherein a base level of the householdexpenses as obligations, and other of the household expenses areorganized by the desirability ratings of the household expenses andusing the alternative levels of funding, thereby representing at leastprimary and secondary goals among the household expenses, and and aresidual (or deficit) of the resources exceeding (or failing to satisfy)the claims is reported, thereby reflecting wealth building.
 19. Thenon-transitory machine readable memory of claim 18, further includingcomputer instructions that instruct a processor to repeatedly run aprobabilistic simulation to evaluate performance of at least thefinancial assets and the employment prospect, including applying aplurality of a-priori rules about liquidating the positions in thefinancial assets and modifying the household expenses to satisfy theclaims.
 20. The non-transitory machine readable memory of claim 18,further including computer instructions that instruct a processor, whenrunning the probabilistic simulation, to take into account risks ofunemployment related to the employment prospect.